Consumer Spending as the Key Driver
Consumer spending drives most economic activity, so indicators tied directly to spending, like personal incomes and interest rates, make the best predictors of overall economic performance.
Consumer spending leads to production and capital investment, so forecasting it well forecasts other indicators.
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The book Ahead of the Curve by Joseph Ellis discusses improving economic forecasting by using the right indicators and tracking year-over-year data instead of short-term fluctuations. It argues that recession definitions are overrated, and that slowing growth is more damaging than commonly realized. The book advocates focusing on consumer spending as the main economic driver, and provides guidance on relating indicators like incomes, interest rates and stock markets to spending. It aims to help readers make better forecasts for economies, industries and companies.
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The economic cycle is driven by cause and effect. Personal income drives consumer spending. Businesses respond to consumer spending by increasing production which, in turn, requires greater investments in infrastructure/capital spending. Consumer spending, production and capital spending all driv...
Consumer Spending Is The Main Driver Of The Economy
Consumer spending dominates the economy. Because it is such a large share of GDP, it drives corporate profits — and corporate profits, as we saw, drive employment. The stock market is a predictive indicator, moving up and down with consumer spending.
Consumer spending forecasts, then, can...
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