Consequently, the unemployment level does not rise sharply. But now the declines in U. The latest data indicate that the sector has suffered deep cuts in employment. As it is, over , manufacturing jobs were lost in June after , were shed in May.
And more layoffs were planned. Declining profits lead to a decrease in capacity utilization so that unsold goods begin to accumulate. According to the Fed, excess capacity is at the highest level in almost 20 years.
As profits fall, employment and retail sales also go down. Consequently, an industrial slowdown brings about excess capacity and rising inventories. Both these problems will emerge even if there are continued advances in technology. An indicator of the magnitude of these problems is seen in shrinking dividends.
As a percentage of prices, dividends are now about 2 percent, substantially lower than their historical average of 4. It turns out that yields of 2 percent or less have preceded economic slumps. Although slowing profits are causing dividends to fall, the real cause is overheated monetary growth and credit expansion that caused shares to be overvalued.
Unfortunately, cheap-money policies will not resolve the fundamental economic imbalances. Indeed, additional rounds of interest-rate declines may actually worsen them. With debt-servicing expenditures as a percentage of American household income at a record high, it becomes increasingly problematic when mortgage debt is used to finance other debts or maintain consumption levels.
As it turns out, interest-rate cuts have encouraged an expansion in second mortgages and long-term refinancing to consolidate short-term debts, like credit cards, that demand higher interest rates. Eventually, additional consumption borrowing will lead to a crushing debt burden that brings personal bankruptcies and weaknesses in the banking system.
In turn, the collapse of consumption will contribute to business failures and more weaknesses in the banking system. She is the President of the economic website World Money Watch.
As a writer for The Balance, Kimberly provides insight on the state of the present-day economy, as well as past events that have had a lasting impact. Consumer spending is what households buy to fulfill everyday needs. This private consumption includes both goods and services. Every one of us is a consumer. The things we buy every day create the demand that keeps companies profitable and hiring new workers. Almost two-thirds of consumer spending is on services, like real estate and health care.
Other services include financial services, such as banking, investments, and insurance. Cable and internet services also count, and even services from non-profits.
The remaining one-third of our personal consumption expenditure is on goods. These include so-called durable goods, such as washing machines, automobiles, and furniture. More frequently, we buy non-durable goods, such as gasoline, groceries, and clothing. There are five determinants of consumer spending. These are the things that affect how much you spend. Changes in any of these components will affect consumer spending.
The most important determinant is disposable income. That's the average income minus taxes. Without it, no one would have the funds to buy the things they need.
That makes disposable income one of the most important determinants of demand. As income increases so does demand. If manufacturers ramp up to meet demand, they create jobs. Workers' wages rise, creating more spending. It's a virtuous cycle leading to ongoing economic expansion. If demand increases but manufacturers don't increase supply, then they will raise prices. That creates inflation. The second component is income per capita.
It tells you how much each person has to spend. Income measurements might rise just because the population increases. Income per person reveals whether each person's standard of living is also improving. Income inequality is the third determinant of spending. Some people's income may rise at a faster pace than others. The economy benefits when most of the gain goes toward low-income families. They must spend a more significant share of each dollar on necessities until they reach a living wage.
The economy doesn't benefit as much when increases go toward high-income earners. They are more likely to save or invest additions to income instead of spending. The fourth factor is the level of household debt.
That includes credit card debt, auto loans, and school loans. So while consumer spending may stay low, business spending can pick up the slack. Remember, in a dynamic economy the decision by businesses to spend more investment funds and hire more workers is a function of both current consumer demand and future consumer demand. As the St. Granted, the ultimate function of business activity and entrepreneurship is to fulfill the needs of consumers, and the most successful firms are those that satisfy their customers.
But more important, who discovers the new, improved products that consumers desire? Who is the catalyst that determines the quantity, quality, and variety of goods and services?
Did the consumer come up with the idea of personal computers, SUVs, fax machines, cell phones, the Internet, and the iPhone? He is the former president of FEE and now produces FreedomFest, billed as the world's largest gathering of free minds.
Please, enable JavaScript and reload the page to enjoy our modern features. This work is licensed under a Creative Commons Attribution 4. Please do not edit the piece, ensure that you attribute the author and mention that this article was originally published on FEE. Latest Stories. Consumer Spending Drives the Economy? Mark Skousen. Economics Entrepreneurship.
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