The consumer goods sector includes a wide range of retail products purchased by consumer right from food and clothing to luxury items such as jewelry and electronics. While overall demand for food is not likely to fluctuate, however, the specific foods consumers purchase can vary significantly under different economic conditions. Consumer spending, another term for voluntary private household consumption or the exchange of money for goods and services,varies greatly depending on a number of economic factors. The economic factors that most affect the demand for consumer goods are employment, wages, consumer confidence prices and Interest rates, effect of invisible hand, etc.
Effect of employment & earnings
Level of employment is one of the key factors influencing demand for consumer goods. The more people having stable income, the more people can take their purchasing decision. Due to this, the unemployment rate report is one of the leading economic indicator that gives signs to demand for consumer goods.
Likewise, the level of wages also affects consumer spending. If wages are rising on regular intervals then the consumers generally have more to spend. If wages are not falling, demand for optional consumer goods is likely to fall.
Consumer confidence is another important factor affecting the demand for consumer goods. Regardless of their current financial situation, consumers are more likely to purchase greater amounts of consumer goods when they feel confident about both the overall condition of the economy and about their personal financial future. High levels of consumer confidence can especially affect consumers’ inclination to make major purchases and to use credit to make purchases.
Overall, demand for consumer goods increases when the economy producing the goods is growing. An economy showing good overall growth and continuing prospects for steady growth is usually accompanied by corresponding growth in the demand for goods and services.
Prices and interest rates
Prices, affected by the rate of inflation, naturally impact consumer spending on goods significantly. This is one reason the producer price index (PPI) and the consumer price index (CPI) are considered leading economic indicators. Higher inflation rates erode purchasing power, making it less likely that consumers have excess income to spend after covering basic expenses such as food and housing. Higher price tags on consumer goods also deter spending.
Interest rates can also impact the level of spending on consumer goods substantially. Many higher-end consumer goods, such as automobiles or jewelry, are often purchased by consumers on credit. Higher interest rates make such purchases substantially more expensive and therefore deter these expenditures. Higher interest rates generally mean tighter credit as well, making it more difficult for consumers to obtain the necessary financing for major purchases such as new cars. Consumers often postpone purchasing luxury items until more favorable credit terms are available.
The effect of the invisible hand
The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interest of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.
Through competition for scarce resources, consumers indirectly inform producers about what goods and services to provide and in what quantity they should be provided. As a result of their collective demands, preferences and spending, consumers tend to receive cheaper, better and more goods and services over time, with all else being equal.
Consumer spending have five determinants; changes in any of these components will affect consumer spending.
1- Disposable income.
That’s the average income minus taxes. That makes disposable income one of the most important determinants of demand. As income increases so does demand. If manufacturers ramp up to meet demand, they create jobs. It’s a virtuous cycle leading to ongoing economic expansion. If demand increases but manufacturers don’t increase supply, then they will raise prices. That creates inflation.
2- Income per capita
It tells how much each person has to spend. Income measurements might rise just because the population increases. Income per person reveals whether each person’s standard of living is also improving.
3- Income inequality
It is the third determinant of spending. Some people’s income may rise at a faster pace than others. The economy benefits when most of the gain goes toward low-income families. They must spend a more significant share of each dollar on necessities until they reach a living wage. The economy doesn’t benefit as much when increases go toward high-income earners. They are more likely to save or invest additions to income instead of spending.
4- Household debt
The fourth factor is House hold Dept. It includes credit card debt, auto loans, and school loans. Current consumer debt statistics show that household debt has reached new record levels. Surprisingly, high health care costs are one of the biggest causes of overwhelming debt.
5- Consumer expectations
If people are confident, they are more likely to spend now. The Consumer Confidence Index measures how confident people are about the future. It includes their expectations of inflation. If consumers expect inflation to be high, they will buy more now to avoid future price increases.
[box type=”note” align=”” class=”” width=””]The author, Mr. Nazir Ahmed Shaikh is a freelance columnist and an academician by profession. Currently he is associated with SZABIST as Registrar and could be reached at email@example.com.[/box]