Consumer Confidence and Spending in Our Economy

One of the major factors that indicate whether we have a booming or dismal economy is consumer confidence and spending. Consumer confidence is such an important economic indicator that it is tracked and measured by the Bureau of Labor. You can access information about this important indicator at the Bureau of Labor Statistics web site.

Consumer confidence is such an important influence on the overall condition of the economy for the following logical reason: The more people spend, the more existing businesses thrive and expand, the more jobs are created, and the more new businesses are started to meet the demand for services and products. Remember, for the economy to be strong, there must be steady growth. Steady growth cannot occur without consumer confidence and spending.

One example of how consumer confidence and spending affects the economy can be illustrated using the annual holiday season. Many businesses, primarily those in the retail sector, depend on a high volume of sales during the holiday season to maintain their businesses during the rest of the year. When consumers are confident about employment, stock market returns, and low interest rates, they spend much more freely. At a minimum, this keeps businesses going, and at a maximum these businesses show profits, hire more employees, and expand as well.

However, the opposite is the case when consumer confidence is low. That is, spending goes down because people aren't optimistic or secure about the near-future. Low consumer confidence often results in businesses with low earnings and sometimes results in businesses laying off and downsizing employees or even closing down altogether. Of course, these events then drive consumer confidence and spending down even further.

It's important to note at this point that freewheeling spending by consumers can have a down side. Namely, when demand for products and services exceed availability, this allows and sometimes necessitates that businesses charge higher prices. Therefore, now the same amount of money purchases less--commonly known as inflation. The buying power of your money goes down so you need to make more and spend more to get the same service or product. This is a common result of the Federal Reserve's lowering of interest rates to add money to a sluggish economy.