We have all heard the old adage: The more things change, the more they stay the same. Nowhere is this more applicable than with some of the latest and greatest gadgets most of us love to purchase. I am certainly guilty of wanting the newest technology, no matter what that technology applies to; from televisions, to phones, to the latest software.
I recently bought some new shirts, and was debating on where to take them to get them laundered. I have had bad luck with some dry cleaners, so I am reluctant to take my clothes in for laundry service. Several of my friends have recently bought garment steamers, so I thought I would try one to see if I could use it instead of having to take clothes to the cleaners, or, my worst case possibility, iron them myself. I was very excited to receive my steamer this week, and to try it out. It works great! The problem is that it takes just as long to steam a shirt as it does to iron one.
This experience got me to thinking about all of the new gadgets that hit the market with so much hoopla, only to quickly fade from public consciousness, either because they don’t deliver on the hype, or simply because another, newer, supposedly even better gadget trumps it. Just as there is no real substitute for a hot iron and can of spray starch, many of the old, tried and true tools that have been around for years often work just as good, if not better than the newest gadgets, even if we have convinced ourselves otherwise.
In the entertainment category, I will freely admit to wanting the latest and greatest. I watch a lot of television, and there is nothing better than having a giant flat panel, HD television with surround sound to watch sports or a good movie. But how much added enjoyment do we really get from watching something on the big screen versus a somewhat smaller, non-HD television? This is an interesting and highly subjective question, but it underscores the importance of constantly evolving technologies as a key driver for the U.S. economy.
Seventy percent of our economy each year results from consumer spending. Part of that spending is on durable goods—items we buy that last at least three years. The rest is spent on consumer non-durables, or things that don’t last as long. The combination of these two segments of consumer spending is the key to whether we have a good or bad economy. So far, although consumer spending has been very weak, government spending, and to a limited degree corporate spending (a significant amount of which has been spent to build inventories back up from extremely low levels), has substituted for consumer spending, keeping the economy from falling into a deeper, longer-lasting recession (or from falling back into recession—a double dip recession). The problem is that, at some point (and we may already be at this point) the government will no longer be able to borrow more money to spend in the economy, and if consumer spending has not rebounded by the time the government cries uncle, we will slide back into recession (if we haven’t already).
We will get our next installment on U.S. GDP (Gross Domestic Product)—the total value of all goods and services produced in the country within one year, around the end of October. Our GDP growth was 3.7% (annualized) in the first quarter of this year, but declined to 1.6% during the second quarter. It is anyone’s guess, but we could very easily see GDP growth drop into the negative this quarter. If this occurs, consumer confidence will decline dramatically, causing a further decline in consumer spending.
The noted economist John Maynard Keynes developed a theory of consumption that focused primarily on the level of people’s disposable income in determining their spending. The rate at which consumers increase demand as income rises is called the marginal propensity to consume. For example if someone receives an increase in income of $2,000 and they spend $1,500 of this, the marginal propensity to spend is $1,500/$2,000 = 75%. The remainder is saved—so the propensity to save would be 25%.
Many banks and economists have economic models that seek to predict what will happen to consumer spending after various shocks. In the long-term, the thing that matters most is real individual incomes. Changes in the amount we earn are by far the most important feature determining how much we spend. Other features, such as the value of our homes or our financial savings, matter a bit but their effect is dwarfed by changes in our earnings.
The key factors that determine consumer spending in the economy can be summarized as follows:
- The level of real disposable household income
- Interest rates and the availability of credit
- Consumer confidence
- Changes in household financial wealth
- Changes in employment and unemployment
The willingness of people to make major spending commitments depends on how confident they are about both their own financial circumstances, and also the general state of the economy. Consumer confidence is quite volatile from month to month. Some of the fluctuations are seasonal, but the underlying trend is what really matters.
The main factors affecting consumer confidence are:
- Expectations of future income and employment
- The current level of interest rates and expectations of future interest rate movements
- Trends in unemployment and changes in perceived job security
- Anticipated changes in government taxation
- Changes in household wealth including movements in house and share prices
Getting back to our discussion of the American obsession with the latest gadgets, we have seen a substantial decline in consumer spending due to the recession, and thus a significant decline in spending on these gadgets. An interesting question one might ask is; Have we seen a permanent shift in consumer behavior, or will be see the American public revert right back to their high rates of consumption, as soon as unemployment improves? One of the positives of the recession has been that consumer debt levels are coming down as individuals tighten their belts and pay-down their credit card balances. This is good for two reasons: 1) because we owe far too much in this country; and 2) when the economy does improve, and consumer confidence rises, we will have buying power, which could drive a much faster pace to the recovery.
I have no doubt that I, along with most people, will continue to want and to buy the latest gadgets, whether for the kitchen, computer, garage, or for entertainment. I just can’t help thinking about my old iron and spray starch though…they do work pretty well.