Thesis: Consumer spending is important in increasing consumer confidence and the overall appearance of our country’s economic state.
An important indicator of the economy is consumer confidence. When considering consumer confidence there are two different indexes to consider: the Consumer Confidence Index and the University of Michigan Consumer Sentiment Index. The Consumer Confidence Index is a product of a five-question survey that is given out to 5,000 households each month that asks about opinions regarding current business conditions and employment. The Consumer Sentiment Index is based on a monthly survey with a smaller sample size but more in-depth questions. Although the usefulness of these indexes in predicting future consumer spending has been debated, most economists believe that they are important to include when creating future models. Over the past few decades these consumer attitude surveys have gained credibility, as they are a good reflection of people’s attitudes regarding the economy.
Consumer confidence acts a benchmark in determining the health of the economy. Consumer spending and saving, which is directly related to their perception and confidence regarding the current economic state, makes up about 70% of economic activity. Therefore it would be foolish to ignore it when predicting the direction of the future economy. When consumer confidence is lacking the business community grows nervous and adjusts their business plans accordingly. These adjustments include changing product scheduling, cutting back on production, limiting work hours and stalling hiring processes. Ultimately this can become a self-fulfilling prophecy as these cut backs and adjustments contribute further to decreasing consumer confidence. Thankfully, this same sequence of events can work in the opposite direction and accelerate the economy.
In order to use consumer confidence as a way to help stimulate the economy one must understand what contributes to the fluctuations in consumer confidence. Low job prospects impact consumer confidence the greatest with concerns about income following suit. During the previous recession when unemployment rates were historically high, the consumer confidence index reached a scary low of 46. For comparison purposes a healthy economy should have a consumer confidence index double that amount. In addition to employment, political news, media personalities, and weather can also change the consumer confidence index.
As people’s attitudes about their current well-being improve, their spending will increase with a decrease in unemployment following suit. In order to begin this circular sequence of events, consumer spending or employment numbers must increase in order to stimulate and increase the consumer confidence index and ultimately to create a healthier economy.
Japan’s economy is on its way out a recession, however, the recovery is taking slightly longer than predicted. Experts recently predicted that Japan’s economy would growth at a rate of 3.6% on an annualized basis through the first three months of the new year. However after recent figures came out, experts indicate Japan’s economy only grew 2.2%. This was well below expert predictions and is reason for concern. I believe Japan is on the right track and needs to raise consumer spending if it wishes to continue on an upward tend, however slow it may be.
While Japan’s economy did miss expectations, the economy did grow. The main cause of this was growing exports. Exports grew 2.7% from the previous quarter, mainly driven by exports to China and Japan. The weakened yen has a lot to do with this. As we have learned in class, when a currency depreciates relative to foreign currencies, exports become cheaper. China, Japans largest importer, and the United States, Japan’s biggest market, both took advantage of this and increased their purchases from Japan. However, with China and the Eurozone’s economies facing uncertainty moving forward, this is something that can not be counted on to maintain ling run growth. While exports are important, the yen will not stay weak forever and eventually Japan will need to find more sustainable ways to maintain growth.
As a recent Wall Street Journal article titled, “Japan Escapes Recession But Growth Misses Forecasts” points out, 60% of Japan’s GDP depends on domestic spending by consumers. The problem appears to be that wages are not rising as quickly as prices. With prices rising slower then wages, it makes spending more expensive as consumer purchasing power is diminished. The article states, “I was surprised by how weak household spending was,” said Shotaro Kuga, an economist at Daiwa Institute of Research, said of the fourth quarter results. “The economy is recovering—it’s just the pace of the recovery is less than forecast.” http://www.wsj.com/articles/japan-q4-gdp-worse-than-expected-at-22-1424044641. It appears that Japan is not too concerned about its recent growth as it appears they are in fact past the worst part of the recession. The economy has grown for two straight quarters which is obviously a good indication things are improving.
According to recent economic forecasts, experts predict Japans economy to grow 3.7% in the fourth quarter. The consumption tax increase from last April is what many believe lead to the Japanese recession. http://www.ibtimes.com/japan-economic-outlook-2015-economists-forecast-q4-gdp-expand-37-economic-growth-1817062. Japan should consider reacting these taxes if they wish to spur the economy. Even if they implement a tax cut that is not a big as the tax increase in April, they will net be collecting more taxes than they had been. If Japan fails to meet their fourth quarter growth forecasts as badly as they missed them so far, they might find things getting more difficult as 2015 continues. It will be very interesting to see what happens over the next few months.
The Federal Reserve had their first meeting of the new year on January 28th. The meeting did not yield too much news as the Fed announced they would stay on track for raising short term interest rates starting this June. The summer of 2015 has been the expected time the Fed would being to raise these short term rates. However, due to recent slowing inflation, many investors feel that the Fed will not raise rates until this fall. These near 0 short term interest rates have held steady for six years as the US economy continues to recover from its greatest recession since the Great Depression. The Fed was overall very optimistic about the economy given solid economic and job growth. These strong numbers coupled with falling oil prices and rising consumer confidence were enough to offset the inflationary concerns, enabling the Fed to keep summer 2015 as their goal. One of the Feds main jobs is to control for inflation. I believe this role will make the Fed wait until the fall to begin raising rates unless something remarkable happens in the next six months. The articles notes, “The Fed’s stated goal is to keep prices rising at an annual rate of about 2 percent, part of its effort to support economic growth and grease the wheels of commerce. But it has not hit that target in more than two years, and it is increasingly unlikely to achieve it this year.” http://www.nytimes.com/2015/01/29/business/federal-reserve-rate-decision.html?_r=0. With the eurozone and emerging markets struggling, their is no need to rush into raising rates. The US has shown strong growth the last couple years and it would be idiotic to rush into things just to “stay on track.” These inflationary concerns are most likely due to falling oil prices and not an overall sign of economic weakness. The Fed is remaining patient and said they will continue to monitor the state of the economy before the rush into a decision. Regarding the long term, the Fed said, “Even after employment and inflation get to their targets, economic conditions, may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” http://www.businessinsider.com/federal-reserve-announcement-january-28-2015-1. This Fed announcement will most likely continue to spur economic growth. If the Fed came out and said they saw signs of economic weakness, that could potentially be detrimental to economic development and consumer confidence. While I never think the Fed would actually say something that frank and blunt, they could have beaten around the bush. Fortunately, they, along with with many experts, view the US economy as strong as it continues its recovery. If the Fed said they thought the economy was doing so well they would start raising rates next month, that could also hurt the US economy and confidence. When the Fed does beginning raising rates, I expect the market to go down as investors becoming frightened about the unknown future. These are uncharted waters the Fed and US economy are navigating right now. Hopefully the Fed has been thinking ahead and is able to raise rates without harming the economy and confidence. Overall, this recent Fed announcement was positive as it indicated the Fed was on track with its plan to raise rates starting this summer.