- Consumer spending is the largest component of GDP.
- Many have predicted a contraction in spending, along with housing and other factors, will lead to negative GDP growth and an accompanying recession.
- Consumer spending is still growing, contributing to economic growth.
- Spending, like conditions in general, continues to be underappreciated and likely not fully reflected in stock prices.
There are plenty of doom and gloom headlines to choose from these days. For months, the story was sown that housing, credit crunches, runaway gas prices, and myriad other factors would conspire toward the coup de grace: A screeching halt in consumer spending and thus a recession. Why is consumer spending so important? It's by far the largest component of GDP, representing about 70% of the total figure. In other words, it's hard to have a growing economy (and easier to slip into a recession) if US consumers aren't spending. But despite the negative vibes, that's exactly what they continue to do.
Consumers Not Dead Yet
By Paul R. La Monica, CNNMoney.com
Of course, economic data can vary dramatically from month to month, so a single good number for March, while a nice bit of news amid the gloom, isn't terribly meaningful. But it's not just that the March figure surprisingly beat expectations—personal consumption grew throughout 2007 and the first quarter of this year. The initial estimate for Q1 2008 spending came in at 0.8%, a major contributor to Q1 GDP growth (itself an estimate) of 0.6%. Neither of these numbers are barn-burners, and they are likely to be revised, but as with the preponderance of other relevant economic data today, they don't suggest impending doom, but mild growth.
Unsurprisingly, today's consistent consumption growth has gone largely unnoticed. And it's not the only story denied the limelight. Other factors ranging from strong earnings, benign interest rates, solid global economic growth, a favorable spot in the election cycle and others have been ignored in favor of what's wrong with the economy, or the ever popular starlet run amok exposé. (See our 03/26/2008 story, "Positively Ignored" for more.)
Part of the reason for the negative focus is undoubtedly election year politics. After all, if you're running on a platform for change, you're likely to claim there's a lot that needs fixing. And current office holders have to show they're doing something in response. Like, for example, passing an economic stimulus package. The much ballyhooed stimulus package, passed with overwhelming bipartisan support earlier this year, will give $110 billion in tax rebates to 130 million Americans. Those feel like big numbers, but the rebates will amount to only a few hundred dollars per taxpayer on average, and are unlikely to do much to change spending habits. (And anyway, it's not as if this is a total freebie. After all, the government is giving back already collected tax dollars! Why not just cut taxes instead?)
Which is fine, because spending is, well, fine. This may come as a surprise to many who believe spending is inexorably tied to housing. In fact, personal spending is much more closely tied to personal income, which continues increasing nicely of late. That leads to growth in consumption—conspicuous or not.