Since the unemployment rate has been steadily declining since November 2013, it would be fair to expect to see increasing levels in both consumer spending and consumer confidence. With personal consumption accounting for around 70 percent of our gross domestic product, increased consumption can help the economy achieve a desirable rate of growth. Since personal consumption usually increases as consumer confidence increases, consumer confidence is a key indicator in determining which way the economy may be heading.
Economic data for January 2014 indicated that personal income rose as compared to December 2013. Personal spending also increased during January 2014 as compared to December 2013, which could be a sign of increased consumer confidence. During the past month, however, General Motors experienced declining U.S. sales: it is possible that the recent rise in personal spending could be a misleading representation of consumer confidence. When consumers are purchasing expensive items such as cars, they must feel comfortable with the states of their current jobs since they are taking on additional debt. Given that General Motors experienced declining sales in the U.S. earlier this year, this could indicate that consumers may not be willing to take on additional debt just yet.
However, when considering single-family homes in the U.S., sales in January 2014 reached a level that has not been seen in at least five years. When demand for new homes increases, consumers must be optimistic about the future. The fact that new home sales are rising supports strong consumer confidence. Therefore recent car sales are less representative of consumer confidence, as sales may only be dropping because of slow-moving inventory caused by the recent harsh winter weather.
When looking for indications on consumer confidence, home prices and home sales should receive more attention than car sales which as we have seen can be impacted by forces outside of our control such as the weather. Also, although the unemployment rate can give some indication of consumer confidence, the unemployment rate has its flaws. For example, the number of people who are working part-time jobs but would prefer full-time jobs remains high. The unemployment rate considers part-time workers employed and also excludes discourages workers from the labor force. Therefore the falling unemployment rate may be because more workers are leaving the labor force, which shows that economic indicators are open to misinterpretation. Even though economic indicators are open to interpretation, the recent increase in home sales shows that consumer confidence may be moving in the right direction. It will be interesting to see the numbers for new home sales in February as the economy gradually departs from a period of historically low rates.
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