Consumer Spending Breakdown: The Good, the Bad, and the Ugly

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Last Friday, the Department of Commerce’s Bureau of Economic Analysis slashed its advanced estimate for fourth-quarter gross domestic product growth from the 3.2 percent pace it reported last month to a 2.4 percent annual rate, and that 0.8 percentage point drop is equivalent to $32.7 billion. The downward revision was a sign that the economy had indeed lost momentum in the final three months of 2013 as feared. Both the 16-day shutdown of the federal government in October and the unusually cold weather that hit much of the United States in late December weighed heavily on economic activity, while the expiration of long-term unemployment benefits, cuts to food stamps, and the fact that a back stock of unsold goods forced businesses to place fewer orders with manufacturers also weakened growth.

Frigid temperatures have hurt retail sales, residential construction and home sales, industrial production, and kept companiess in the retail, construction, and industrial industries from hiring more employees. Further, poor employment gains directly impact consumer spending — a measure that accounts or approximately 70 percent of the country’s gross domestic product. As Société Générale economist Brian Jones told Bloomberg, “more people with jobs means more money to spend.” Plus, the expiration of long-term unemployment benefits and cuts to food stamps also mean that in the past few months, many Americans were put in a far worse position to increase their outlays.

Yet, despite the tough economic headwinds of fourth-quarter, everyday private-sector activity drove the U.S. economy forward in the fourth-quarter. While real personal consumption expenditures were lowered from a 3.3 percent increase to a 2.6 percent gain, the measure contributed 1.73 percentage points to GDP growth. That pace represented the strongest pace recorded since the first-quarter of 2012 — an encouraging sign after retail sales recorded negative growth for the second consecutive month in January. There is also increasing evidence that consumer spending will stabilize in the new year.

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