Alroy Commentary - Why U.S. Consumption is so important?
Christmas is coming and U.S. consumers are queuing up to purchase Christmas presents to their loves. Investors stare at the sales figures nervously and hope consumption can be the growth engine of US economy. Why? It is because American spends a lot of money on consumption. Consumption accounts for around 70% of U.S. economy (In contrast, this figure is 57.53% in Euro Area, 59.25% in Japan and 62.23% in Hong Kong) and is the major force to drive U.S. sales, industrial production, import and jobs growth etc. So if you would like to gauge the latest and most accurate information of consumption, the following are some of the common used economic indicators for economists and investors.
1. Personal income: It represents the money that households receive before taxation.
2. Personal spending: In contrast to personal income, personal spending is more important and has direct impact to the economy. Personal spending composed of duration goods, non-durable goods and services. They accounts for around 15%, 30% and 55% of the data respectively. That’s why this figure catches more attention from investors.
3. Retail Sales: This figure cannot fully cover sales in service sector well. Investors could not know how much consumers spend on services such as insurance and movies. However, this figure are calculated in nominal term, thus, it is difficult to determine the increase of retail sales are from higher prices or higher sales.
You may think higher personal income means higher personal expenditure. However, the relationship is not that simple. In recent 20 years, personal spending is more influenced by the perception of wealth. If households expect higher value of real estate and financial assets, they will spend more. This phenomenon is known as wealth effect. Thus, you may also need to monitor the consumer confidence index and the movement of stock markets to get the full picture.
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