Economic Analysis: The Cautious Consumer

By at 9 July, 2024, 10:27 am

by Raymond J. Keating –

The “consumer” sits in an interesting place in our economy.

While consumer spending accounts for two-thirds to seventy percent of GDP and consumption is the endpoint of the economic process, if you will, the consumer also is, as I have argued many times, a follower. That is, consumers take their cues largely from businesses, entrepreneurs and investors.

If entrepreneurs are starting businesses, and businesses and investors are in investing in innovations and expansion, and businesses are hiring, then the consumer will feel secure and optimistic, and spend accordingly. However, if businesses aren’t be created, if investment lags, and/or if businesses aren’t hiring, or if they’re laying people off, then consumers will rein in their spending.

So, where is the consumer of late? Let’s consider three key reports.

GDP Growth Slows. First, the latest GDP report for the first quarter of 2024 showed that growth in real personal consumption expenditures (PCE) slowed markedly. Growth in real PCE registered 1.5 percent in the first quarter (seasonally adjusted annualized rates). That was down from 3.3 percent in the fourth quarter 2023 and 3.1 percent in the third quarter.

The Read on Consumer Confidence Mixed. As SBE Council noted, the latest measure of consumer confidence from The Conference Board ticked down in June, and continued to show that consumers were split of where the economy is now and where it might be headed. We noted that “consumer confidence edged down in June. And the divergence between Consumer Confidence Index’s two components – i.e., the Present Situation Index and the Expectations Index – persisted. The Consumer Confidence Index moved down from 101.3 in May to 100.4 in June (1985 = 100). The Present Situation Index, which is ‘based on consumers’ assessment of current business and labor market conditions,’ actually moved up from 140.8 in May to 141.5 in June. Meanwhile, the Expectations Index, which reflects ‘consumers’ short-term outlook for income, business, and labor market conditions,’ decreased from 74.9 in May to 73.0 in June.”

Consumer Credit. And now we have the latest read on consumer credit outstanding from the Federal Reserve. In May, revolving credit (mainly, credit cards) grew at an annualized rate of 6.3 percent. Meanwhile, nonrevolving credit (i.e., including “motor vehicle loans and all other loans not included in revolving credit, such as loans for mobile homes, education, boats, trailers, or vacations,” but not loans secured by real estate) grew by only 1.4 percent.

It should be noted that both forms of credit experienced slow growth or contraction in the previous two months, with revolving credit growth registering -0.8 percent in April and 1.6 percent in March, and nonrevolving credit growth coming in at 2.4 percent in April and -1.0 percent in March. And keep in mind that these measures reflect changes in nominal dollars, so once inflation is considered, the real changes are diminished.

While these various data are not in complete agreement, the overarching message seems to be that consumers are cautious or worried about where this economy is headed. And that has been the same message delivered by small business owners in various outside surveys, including SBE Council’s Small Business Check Up surveys conducted over the course of the past year. Our new Check Up survey will be released next week and small business owners, again, report widespread worry about the direction of the economy. As noted above, consumers are taking their cues from businesses.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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