Consumer Spending and the Economy: Are You A “One in a Thousand” Investor?
by Dr. Mark Skousen, Chairman, Investment U
Tuesday, January 9, 2006: Issue #625
The day after Christmas, I said hello to a postal worker and asked him how his Christmas went. He surprised me: “Not well, thank you.”
“Why not?” I asked.
“We’ve lost the true spirit of Christmas,” he implored. “Now it’s all about spending money we don’t have on gifts we don’t want.”
I could see I encountered a modern-day Ebenezer Scrooge.
The newspapers are full of stories these days about the absolute necessity of retail spending to keep the economy booming. But it’s just not true
Christmas Spending Costs Us $10 billion a year?
Retail sales jumped 15% in the last two months of the year, and according to the National Retail Federation, U.S. consumers will have spent $457 billion this holiday season, or approximately $4,000 per household.
Millions of books, ties, jewelry, picture frames and appliances are given away every year to friends and relatives who don’t want them. This social “deadweight loss” can amount to $10 billion a year, based on surveys, even after re-gifting.
There’s a famous paper by Wharton economist Joel Waldfogel (American Economic Review, December 1993), which argues that the frenzied gift-giving during December is a highly inefficient way to connect consumers with goods. He and other economists argue that we would be better off if spending were spread out more evenly throughout the year.
So what really drives the economy?
It’s Business, Not Consumer Spending That Drives the Economy!
The idea that consumer spending is the lifeblood of the economy is an old wives’ tale. The national media and Wall Street have been brainwashed by this conventional Keynesian wisdom. “Oh, if only Christmas were to last year around,” say the spending advocates. Never mind that in January, when the bills come due, consumers have to spend less in order to pay for their spendthrift habits.
What would happen if people stopped giving on Christmas? Horror of horrors, consumption might decline and savings increase. How terrible!
It reminds me of the comments made by the media after Bush’s tax rebates went into effect. I well remember one commentator saying, “If people save those tax rebates, it will do nothing to help the economy recover.” What nonsense.
Four Myths About the Economy Finally Demystified
Here are some common misconceptions about what keeps the economy moving, followed by the facts:
1. Consumption represents 70% of the economy.
Consumption does NOT represent 70% of the economy. It represents 70% of GDP, and GDP is the value of final goods and services only. If you measure spending at all stages of production, consumption represents only about 30% of aggregate spending in the economy. Meanwhile, business spending, including capital goods and gross spending at pre-retail stages of production, represents over 50% of the economy.
2. Consumer spending and retail sales are leading indicators.Not true. The vast majority of leading indicators are on the supply side: manufacturers’ new orders and hours, building permits, real money supply and the stock market.Be the “One in a Thousand” Investor
3. Consumer spending is the cause of economic growth.
Consumer spending is actually the effect of economic growth. New growth comes from the supply side: saving, investment, productivity and technological advances. Here’s an example to prove my point: Seattle’s consumers became big spenders only after Bill Gates and Microsoft created Windows, a technological breakthrough.
4. A decline in consumption and an increase in savings would cause an economic slowdown or slump.
Again, not true. Increased savings would cause interest rates to fall, which in turn would encourage businesses to borrow more to upgrade their tools, equipment, and productive processes, increase training of its workers, and encourage the buying of new capital goods. Increased business spending and hiring offset declines in consumer spending.
Wall Street had a good year in 2006 because of increased business spending, global growth, and technological advances. Consumers increased their shopping this Christmas because of good business conditions and the prospects of lower interest rates, not the other way around.
CNBC commentator Larry Kudlow said it best: “Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs, and thus consumers spend.”
Now you are one of those “one in a thousand” who understands how the economy really works.
This is going to be a good year for stocks, not because of a good Christmas retail market, but because of lower interest rates, a booming export market, and increased global productivity.
Start investing now.
Good trading, AEIOU,
Mark
Today’s Investment U Crib Sheet
- What’s in store for stocks in 2007? Take a look at Investment U #616: 2007 Economic Forecast: Why “Old Faithful” Will Push Stocks Higher In 2007, to see why Mark thinks stocks will push higher over the next 12 months.
Related Investment U Articles:
- Asia’s Emerging Middle Class Consumption is Powering Up
- Take Your Investment Portfolio on an Asian Vacation
- Tough Times For Consumer Goods Companies
- The Return of the American Consumer
- Get a Piece of the Next Nuclear Energy Boom
Comments
**By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy. |
 |
