South-Western EconNews

Consumer Spending on the Rise

Topic

Aggregate Demand/Aggregate Supply

Subject

Consumer Spending

Key Words

Consumer Spending and Sales Incentives

Full Article

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Reference ID: A134765968

News Story

The largest component of aggregate demand in the U.S. economy is consumption spending. Thus, analysts keep a close eye on consumer confidence, spending patterns, and spending levels. June consumer spending was up by 0.8 percent, as many American households took advantage of "We'll give you the same price we give our employees" pricing by auto manufacturers. According to the U.S. Commerce Department, personal income also rose in June as further evidence of a growing economy. "The June gains in personal spending and income point to a pretty firm close to the second quarter, which puts the economy in a good position at the start of the third quarter. The underlying trend of growth is fairly solid," said senior economist Pierre Ellis of New York's Decision Economics.

Purchases of durable goods--those products expected to last three years or more--increased by 3.3 percent in June, due mostly to the increased sales brought on by General Motors's introduction of "employee pricing." Other auto manufacturers were quick to join the bandwagon by offering employee pricing on their cars as well. Ford Motor Company extended employee discount pricing to the car-buying public and posted its first year-over-year sales gain in 13 months. "The employee discount programs have been a huge success," said RBS Greenwich Capital chief economist Stephen Stanley. "It appears that unit auto sales for July will exceed the 20 million (annual rate) mark for only the third time in history."

These discount programs are squeezing automaker profit margins, but are serving to move out unsold 2005 models. Factories now appear to be increasing production after strong demand helped them cut inventories in the second quarter. "The manufacturing sector has worked through its inventory overhang and it's receiving a good stream of orders," said Lynn Reaser, chief economist at Banc of America Capital Management.

Questions

1.	Explain how the "law of demand" works in the information presented in the article.
2.	Use any source available to determine how large consumption spending is as a percent of GDP.
3.	Define consumption spending and compare it to the other components of GDP.

Source

Rueters, "Economic Indicators for June Show U.S. on Sound Footing," The New York Times Online, August 3, 2005.