Consumer Spending Fell, What Does This Mean? | Eastern North Carolina Now

    Publisher's Note: This post appears here courtesy of the John Locke Foundation. The author of this post is Paige Terryberry.

    Consumer spending fell 0.2 percent in December, making this the second consecutive month of decline. Covid savings are drying up and high interest rates appear to be cooling the economy. Officials at the Federal Reserve raised rates again this week. And though some inflation has backed off, incomes are not keeping pace with inflation, meaning many households are leaning on their credit cards for more of their needs.

    For all of these reasons and more, consumers appear to be cautiously cutting down on spending, a warning sign for our economy as a whole, captured by numerous headlines:

    "U.S. consumer spending ends 2022 on weaker footing; inflation slowing" - Reuters

    "Consumer Spending Slid Again in December" - The New York Times

    "The U.S. Consumer Is Starting to Freak Out" - The Wall Street Journal

    Even though consumer spending makes up more than two-thirds of how the government measures GDP, consumer spending is not two-thirds of economic activity.

    If consumer spending were the primary issue, as many believe to be true, then more stimulus spending could be the answer. We know that doesn't work.

    The government spent the equivalent of more than a quarter of the U.S. GDP on Covid relief in 2020 and 2021. This led to high demand artificially propped up by trillions in printed money, even as supply struggled.

    Decreased consumer spending is an issue, however, and a symptom of a bigger problem: decreased investment. Fixed investment is down 6.7% (at an annual rate) over the quarter, according to the advance estimate of 4th quarter GDP data released by the Department of Commerce. Fixed investment includes "purchases of residential and nonresidential structures, equipment and intellectual property products by private businesses, by nonprofit institutions, and by governments in the United States." This is the third consecutive quarter of declining fixed investment. Residential investment alone is down 26.7 percent.

    Investment matters. Buying goods and services alone does not lead to higher employment without investment. Consumers do not have money to spend without the investment and savings that drives production. Investment, on the other hand, backed by savings, does increase employment, production, and overall advancement.