Consumer Spending Up as Incomes Rebound - Essay Example

In the internet article “Consumer Spending Up as Incomes Rebound,” Associated Press Economics Writer Jeannine Aversa describes the state of the spending mood of consumers this past May (http://news.yahoo.com/s/ap/20070629/ap_on_bi_go_ec_fi/economy_99;_ylt=AiZ9o6raphLtyCoPhXLPUm8E1vAI). She describes higher consumer spending as “an encouraging sign that high gasoline prices haven't killed people's appetite to buy.” She goes on to indicate that inflation has moderated, which adds to the sense of a strong economy and is a very positive sign when spending is up.

According to Aversa, May “was the second month in a row that consumer spending went up by 0.5 percent.” This is a trend showing that May was not merely a fluke, and this could be the start of a sustainable trend. Further supporting that hypothesis was the fact that incomes also rebounded in May. As Aversa asserts, incomes are “the fuel for future spending.” Thus, it is a reasonable assumption that we could see continued strong performance on this leading economic indicator.

Aversa also mentions in her article that construction spending also increased in May by nearly a full percentage point. This increase in construction spending was “the biggest gain in nearly 1 ½ years,” and was fueled by “Brisk spending on big government projects, such as hospitals and other health care facilities, and by private builders on commercial construction, such as office buildings, eclipsed continued weakness in the housing sector.” The combined increases in consumer and construction spending arguably illustrate broad economic strength in both the commercial and personal consumer areas leading into the summer months.

Analysis of Article

This article speaks directly to a couple of very fundamental economic indicators. While it is mostly a litany of facts about the state of economic performance in May, the article alludes to the power of income and spending to produce a strong economy. Spending, both consumer and commercial, quickly reverberates to other areas of the economy. Without strong consumer and other spending, it is difficult for other factors of economic health to take hold. Manufacturing and production will only result in large idle inventories if spending is low. That means fewer jobs as companies seek to slash their supplies in response to lower demand, and in doing so reduce their overhead costs including employment.

On the other hand, strong consumer spending translates into increased manufacturing of supply, which in turn leads to greater hiring and lower unemployment. The effect on the quality of life for virtually any geographic area where there is strong overall demand among consumers who are willing to spend money can be monumental. As more and more people come to an area to take jobs and purchase goods and services, it can elevate that area from being blighted to being a bustling, vibrant area in which people can feel good about their community.

A risk posed by this phenomenon, however, can be inflation. As supply grows to meet demand and more and more workers are hired, there can reach a point of full employment where wages begin to rise because the supply of labor is not sufficient. When supply cannot continue to increase because of lack of capacity then prices will likely start to go up. Eventually, as both wages and prices continue to rise, inflation will take root. Thus, increased consumer spending and higher incomes can be a “double-edged sword.”