South-Western College Publishing - Economics  
Consumers Spend for Christmas
Subject Consumer Spending
Topic Aggregate Demand/Aggregate Supply
Key Words

Consumer Expenditures, Job Growth, Interest Rates, and Aggregate Demand

News Story

Retailers are looking forward to brisk and profitable Christmas-season sales. The traditional Christmas shopping season that normally starts just after Thanksgiving seems to have started early this year. Jim Bernau, founder and president of Willamette Valley Vineyards of Salem, Oregon reports that in the week before Thanksgiving, people were already three deep at the counter of his winery's tasting room.

"This holiday season is going to ring some pretty loud bell," Mr. Bernau predicted. "Consumers are definitely shaking off whatever was bothering them." This same scenario has been reported at retail outlets across the nation.

On the statistical side, the University of Michigan's index of consumer confidence finally ticked up this month, after falling for three months in a row. "Things seem to be improving," said Tracy Mullin, chief executive of the National Retail Federation, a trade group for the retail sector.

The importance of consumer spending to the U.S. economy is evident by the fact that it makes up about two-thirds of aggregate demand in the U.S. economy. In the recent recession, consumer spending actually offset the lack of business spending and kept the economy afloat.

With interest rates currently rising, the country will need continuing new jobs to come on line to maintain the consumption component of demand. Rising interest rates will tend to reduce consumption spending, especially on durable goods. In October, American employers added 337,000 new jobs, the largest increase since March, 2005. Such added payrolls should help sustain consumer spending. "There is sufficient job growth to sustain income growth," said Robert Barbers, chief economist at investment advisory firm ITG/Hoenig. "I don't see any lingering concerns," said Richard A. Feinberg, professor of consumer sciences and retailing at Purdue University. "It will be a pretty solid holiday spending season for retailers."

The only caveat will be for the future. If interest rates continue to rise as they are expected to do, the days of debt-powered consumer spending will likely come to an end. In this scenario, additional job creation improvements and increased wages will be necessary to sustain high levels of consumer spending, since businesses will hesitate to invest in capital improvements with higher interest rates prevailing.

(Updated January, 2005)


In an aggregate demand/aggregate supply model of the economy, consumer spending represents the household sector. Name the other types of spending that make up aggregate demand.

2. If consumers spend more out of any increase in income, they are saving less. How does this affect the spending multiplier?
3. Explain the connection between higher interest rates and less spending on durable goods.
Source Eduardo Porter, "Consumers Give Signs of a Free-Spending Holiday Season," The New York Times Online, November 25, 2004.

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