The Rise and Fall of Personal Spending
Between recent inflation rates, delayed production outputs, and the discontinuation of COVID benefits from the government, choosing between cooking at home and eating out has never been easier.
So, as the general population clutched their wallets tightly, economists noticed a trend in the American economy. During the third fiscal quarter, in the July 2022 period, economists saw an increase in personal savings while personal spending continued to decline.
However, before we get into the details of each indicator, how do economists measure the trends of personal consumption? And in a general sense, what is an economic indicator?
An economic indicator measures a change in one part of the economy, often times a change in consumer confidence in the economy, which gives the people an insight into a broader economic picture. Government agencies and private businesses can measure economic indicators through surveys, a census or by monitoring the change in prices or volume of transactions.
Within the big umbrella of economic indicators, personal spending encompasses the idea of much or how little consumers are spending to fuel the economy.
A personal consumption indicator, or Personal Consumption Expenditures (PCE), is the primary measure of consumer spending on goods and services in the U.S. economy. This indicator considers two-thirds of domestic spending, which is a critical factor for economic growth.
The purpose of the PCE is to display the amount of household income spent on current consumption, like cars, clothes, houses, etc., versus the amount that is currently being saved for future consumption. PCE also provides a comprehensive measure of the types of goods and services purchased by households.
With the PCE, we can notice purchasing trends throughout each monthly cycle. Thus, it can help producers and consumers know about the different price changes, like the ones we saw with the spike in gasoline prices, and how that is impacting consumer spending. Without the PCE, it would be harder to tell where current consumption stands; the PCE helps producers know the habits of the consumers, which could also impact price changes.
Personal spending in the US is currently facing one of its weakest periods. As of July 2022, consumer spending was forecasted to rise at 0.1% month-over-month in July 2022, which hit 0.4% below the target rate compared to a full 1% jump in June 2022.
So you might wonder, with COVID cases declining and more businesses reopening to total capacity, what caused this weak performance?
The PCE’s weak performance is partly attributed to service-price increases, namely the housing market and gasoline prices. Due to the lingering impacts of COVID-19 and foreign wars, inflation rates have surged this past year, impacting the consumption that consumers are willing to pay, which is why economists observed that the goods industry saw a decline in products sold. For example, with an increased price of gasoline, consumers were more reluctant to travel. These factors play a massive part in why personal savings increased while personal spending decreased. However, the service industry, like the housing market and international travel, saw a slight uptake in consumption, as the summer season tends to be peak times for travel when there are increasingly more people taking breaks from school and work.
While international travel saw a slight increase in consumption, the purchases of physical products continued to decrease in July. This summer season observed its weakest consumption cycle of physical products sold compared to the previous fiscal quarters. The upcoming holiday season may be the hero needed to bring back personal spending rates, as those are typically times of high volumes of transactions and constant purchases. Either way, as the year continues, one could only assume possible trends that will occur.
