South-Western College Publishing - Economics  
Consumer Optimism High
Subject Consumer Confidence
Topic National Income Accounts
Key Words

Consumption Spending, Expectations, Economic Activity

News Story

Economists and investors watch the consumer confidence level carefully because consumption spending is the largest single component of all economic activity in the United States. Consumer spending has continued to be a growth element in the recovery of the economy.

After rising for two months in a row, the Consumer Confidence Index reached the a three-year high of 105.8 The May reading of 103.1 was more than a five point rise over April. The current reading is the highest since June 2002, when the index was set at 106.3.

"The improvement in consumers' mood suggests that business activity and labor market activity will continue to pick up over the next several months," said Lynn Franco, director of The Conference Board's Consumer Research Center. "And, with consumers in better spirits, and job concerns remaining relatively steady, there is little reason to expect a dramatic shift in consumers' spending."

Franco did warn that the higher oil prices of recent months could make the level of consumer confidence wane in future reports. Oil prices have risen to over $60 a barrel for the first time…. "This could take a bite out of consumer confidence," Franco said, though she acknowledged that consumers so far have been able to weather oil price volatility very well.

Mark Vitner, senior economist at Wachovia Corporation in Charlotte, N.C., agreed that the run-up in oil prices could cause confidence to slip. However, he said he is not worried as long as the confidence measure stays around the 90 to 105 levels. Vitner considers this range to be consistent with moderate economic growth.

Consumer confidence is a powerful determinant of consumption spending. The more confident consumers are the higher consumption is likely to be for any given level of GDP. This most recent finding of a steep increase in confidence suggests that consumers are likely to continue spending in the near future, resulting in a rise in economic activity in general.

The Conference Board's indexes are based on a survey of 5,000 households that participate in a consumer research panel. The latest report is from about 2,500 responses that have been received so far in June. The report will be revised as additional responses are received.

Questions
1.

Use the Internet to find consumer spending as a percentage of GDP.

2. Discuss why high consumer confidence has a positive impact on the labor market.
3. Aside from consumption expenditures, what are the other main spending components of GDP?
Source Associated Press, "Consumer Confidence Rises to Three-Year High," The New York Times Online, June 28, 2005.

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