17 Dec

The Fed Is Banking on Consumer Spending and Business Investment

WRITTEN BY David Ashworth FEATURED IN Macroeconomic Analysis

Consumer spending

Consumer spending, or household spending, is the most important component of US economic output, size-wise, as it forms over two-thirds of total output. Not only economic growth, but also the fates of companies such as Philip Morris International (PM), Costco Wholesale (COST), and Mondelez International (MDLZ) are dependent upon how much consumers are willing to spend.

The lack of consumer spending in 1Q15 emerged as a big cause for concern for policymakers, especially because they had expected the fall in gasoline prices to boost consumer spending.

The Fed Is Banking on Consumer Spending and Business Investment

What is business fixed investment?

Business fixed investment is more formally referred to as nonresidential fixed investment (or NFI). It represents business spending on plants, equipment, and machines that help a business to conduct its work. It forms an important component in the calculation of economic output.

It’s important not because of its quantum in total output, but because of what it represents. Falling business fixed investment indicates that companies are not investing in plants and machinery, possibly due to worries about their profitability. This could also indicate that businesses are not very confident about economic growth gaining traction, and are thus hesitating to invest further.

The Fed’s stance on these two indicators

While reviewing the economy in the December 2015 monetary policy statement, policymakers stated that “household spending and business fixed investment have been increasing at solid rates in recent months.” Household spending was a reference to consumer spending.

Given that exports have stayed down and may continue to be hampered by a global economic slowdown, the Fed is banking on these two aspects of the economy to keep US’ growth chugging along. A rate hike signals that they are confident of this happening. This will also help large cap equity mutual funds such as the Vanguard Growth Index Fund Investor Shares (VIGRX) and the MFS Growth Fund Class A (MFEGX), which have large exposures to consumer-related stocks.

Though consumer spending and business fixed investment are giving the Fed confidence, some cause for concern in the form of inflation remains. Let’s look at that in the next article.

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