Economists have surmised that the U.S. economy may be officially out of the doldrums, but American consumers don’t feel it.

And until consumers do feel it, the economy can’t really be considered to have recovered.

Consumption, in large part, drives the economy, so when the economy is rolling along, in general, consumers are doing their best to drive it forward.

“The economy needs to make things possible for you and make your life livable in the present and give you really good prospects for hope and growth in the future,” says Peter Rodriguez, associate professor of business administration and associate dean for international affairs at the University of Virginia’s Darden School of Business.

“You have to have the sense that the American dream is possible. You have to be living reasonably comfortably. Income levels have to be high enough that you have the opportunity to enjoy other parts of life,” he says.

As the economy is largely made up of the individual fortunes of Americans, consumers cannot do well without a prosperous economy and, in turn, the nation cannot prosper without a thriving populace.

But not everyone is positioned to benefit from a growing economy. For some who are marginalized due to poverty or lack of education, a rising tide won’t raise their prospects.

Look to these economic measurements to discover how consumers are faring in the economy and also whether the economy is contracting or expanding.

GDP

Gross domestic product, or GDP, is a measure of the output of goods and services produced in the United States. The report comes out quarterly from the Bureau of Economic Analysis.

“The traditional measure of the economy has been growth in GDP and growth in economic output,” says Mike Schenk, vice president of economics and statistics at the Credit Union National Association.

But as yardsticks go, it’s kind of unwieldy.

“GDP is too coarse because it is just a measure of the volume of output of the economy overall. Early in the fall we heard a lot of talk about the recession being over and technically that may be true because GDP has begun to rise,” says Rodriguez.

“That is the equivalent of saying that sales have stopped falling, but that is really not that heartwarming — we have laid off a lot of people and they are not benefiting from the growth and are remaining outside what the economy can provide for them,” he says.

GDP is expected to increase over the coming months, but that won’t necessarily mean that the American people are experiencing a growing economy. Instead, it may mean that businesses are simply restocking.

“GDP and manufacturing are likely to have an uptick just basically based on the fact that many businesses have run down their inventory leading up to the crisis and now need to replenish their stock. So it’s not based as much on end-user demand as it is based on a replenishment of inventory,” says Kieran Osborne, co-portfolio manager at Merk Investments. “Although we will have an uptick, I don’t think it will be sustainable economic growth going forward.”

Personal income

Personal income and outlays are measures of how much people make and spend.

High individual incomes mean that average consumers can afford to do what they do best — consume. High personal incomes also make people feel good about the future and their future prospects — at least as long as inflation isn’t too high.

Unfortunately, a rip-roaring economy may not be enough to raise incomes across the board.

“For a generation we’ve seen that the increase in living standards have been pretty modest and a widening of the income distribution so that the overall ability of the economy to benefit people at the bottom end of the income distribution seems to have been largely lost in the past 20 years,” says Rodriguez.

The reason for stagnating incomes? Rodriguez cites global competition for jobs requiring the most easily replicable skills and a strong correlation between flat income levels and education levels. But those at the high end of the income and education spectrums are making headway.

“At the same time we’ve seen that the global economy allows one to leverage their skills if they’re at the high end, so the people with the most skill acquisition and highest education level have been able to really benefit from the huge scale of a more open global economy,” he says.

Inflation

Inflation refers to the price of goods increasing. It can also indicate that there is too much money floating around.

A common measure of inflation as it impacts consumers is the consumer price index, or CPI. The CPI gauges the cost of a basket of common items consumers purchase.

“When you have inflation and your dollar loses its purchasing power, you lose value in that dollar itself down the track,” says Osborne.

Inflation eats into income and savings, which can negate the buying power of consumers both now and in the future.

Inflation may be on the way, leading to more consumer woes.

“We have a very strong view (at Merk Investments) that there is a risk of inflation around the corner given what the Federal Reserve is doing — the interventions in the market and printing trillions of dollars. That is a massive risk for the American consumer,” Osborne says.

Savings, net worth and debt

Though the personal savings rate can’t tell economists how much individual households are saving, it is a good indication of the amount the country as a whole is saving.

Though high levels of debt worked very well in the early 2000s to whip the economy to a fever pitch, it failed miserably as a long-term strategy.

The only sure long-term strategy for individuals and the country is the savings model. If everyone is saving and not spending, there may be a temporary setback to the economy. But eventually all of the savers will have the confidence to spend more money — more wisely this time.

“Since the beginning of 2008 households have lost $11 trillion in net worth. That is about the size of the entire U.S. banking industry,” says Schenk.

“Net worth has declined and declined significantly, and it won’t come roaring back — unless you can foresee or forecast significant asset bubbles in the future — in part, because the way it will come back is the old-fashioned way of people setting more aside in their savings accounts and retirement accounts,” he says.

When consumers dump their debt and pump up their savings, the economy will trundle along at a quicker pace.

<< Back to Financial Literacy’s “How to prosper” table of contents.

Promoted Stories