South-Western College Publishing - Economics  
Consumer Attitudes Are Being Tested
Subject Consumer Confidence
Topic National Income Accounts
Key Words

Consumption Spending, Economic Activity, and Consumer Confidence

News Story

Economists and investors watch the consumer confidence level carefully because consumption spending is the largest single component of national income in the United States. Consumer spending is a necessary element of a sustained recovery, so economists have worried lately that some economic events have strengthened consumer confidence even while other events have dampened it.

"Consumer attitudes are really being tested right now," said Stephen Stanley, chief economist at RBS Greenwich Capital Markets in Greenwich, Connecticut. "These forces are battling to a standstill, so that confidence measures are stable."

The Labor Department recently reported a gain of 288,000 jobs in April after a gain of 337,000 jobs in March. This two-month total was the largest two-month job gain in four years and served to bolster consumer confidence. Couple the improved job situation with the currently low interest rates and consumers appear willing to spend on housing and other high-end goods. Evidence of such spending is reported by a report from The National Association of Realtors indicating that the sales for existing homes jumped in April to the second-highest level on record.

On the other side of the ledger are high gasoline prices, which are siphoning money from consumers that might have been spent on other goods and services. The price at the pump has risen above $2 a gallon, dampening consumer confidence. The primary reason for the increase at the pump is the growing world demand for crude oil and a relatively stable supply. These economic conditions are reflected in higher prices for crude oil and subsequent higher gasoline prices.

The Conference Board measures consumer confidence with an index based on a survey of 5,000 households that participate in a consumer research panel. The latest report showed consumer confidence growing slightly, but less than expected. In response to the report, RBS' Mr. Stanley said, "Look for growth in consumer spending to remain decent but not to pick up along with labor income. Instead, the impetus for growth this year should come on the business side." The current recovery is characterized by relatively strong consumer spending, but slow job growth. Recent reports of new jobs are encouraging, but for a sustained recovery, the business sector will need to show its own confidence by hiring new workers and investing in new capital equipment.

(Updated July, 2004)

Questions
1.

How large are consumer expenditures as a percent of all economic activity?

2. Discuss Mr. Stanley's comment about economic growth coming from the "business side".
3. Write a short essay on how gasoline prices have affected you.
Source Bloomberg News, "Confidence Index Up Slightly; Sales of Existing Homes Climb," The New York Times Online, May 26, 2004.

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