Resource Use through the Business Cycle – Consumer Behavior

Patterns of household consumption determine overall economic direction more than any other sector.

Two primary measures of household consumption are retail sales and a broad-based indicator of consumer spending that also includes purchases outside purely retail establishments, such as utilities, household services, and so on.

Tracking spending (real and nominal) of a specific group(s) of consumer products.

The three major divisions:

(1) durable goods (autos, appliances, and furniture);

(2) non-durable goods (food, medicine, cosmetics, and clothing);

(3) services (medical treatment, entertainment, communications, and personal services).

A weakness in durables spending may be an early indication of general economic weakness.

An increase in durables spending may signal a more general cyclical recovery.

Growth in income is typically a better indicator of consumption prospects. E.g. Disposable income.

Permanent income excludes temporary income and unsustainable losses and gains and tries to capture the income flow on which households believe they can rely.

A higher saving rate may indicate consumers’ ability to spend despite possible lower income in the future.

A rise in the saving rate, usually measured as a percentage of income, may indicate caution among households and signal economic weakening.

The greater the stock of savings in the household sector and the wider the gap between ongoing income and spending, the greater the capacity for households to increase their spending.