A:

The consumer goods sector includes a wide range of retail products purchased by consumers, from staples such as food and clothing to luxury items such as jewelry and electronics. While overall demand for food is not likely to fluctuate wildly, although the specific foods that consumers purchase can vary significantly under different economic conditions, the level of consumer spending on more optional purchases, such as automobiles and electronics, varies greatly depending on a number of economic factors. The economic factors that most affect the demand for consumer goods are employment, wages, prices/inflation, interest rates and consumer confidence.

One of the main factors influencing demand for consumer goods is the level of employment. The more people there are receiving a steady income and expecting to continue receiving one, the more people there are who are in a position to make discretionary spending purchases. Therefore, the monthly unemployment rate report is one economic leading indicator that gives clues to demand for consumer goods.

The level of wages also affects consumer spending. If wages are steadily rising, consumers generally have more discretionary income to spend. If wages are stagnant or falling, demand for consumer goods is likely to fall. Median income is one of the best indicators of the condition of wages for American workers.

Prices, affected by the rate of inflation, naturally impact consumer spending on goods significantly. This is one reason that the producer price index (PPI) and the consumer price index (CPI) are considered leading economic indicators. Higher inflation rates erode purchasing power, making it less likely that consumers have excess income to spend after covering basic expenses such as food and housing. Higher price tags on consumer goods also deter spending.

Interest rates can also impact the level of spending on consumer goods substantially. Many higher-end consumer goods, such as automobiles or jewelry, are often purchased by consumers on credit. Higher interest rates make such purchases substantially more expensive and therefore deter these expenditures. Higher interest rates generally mean tighter credit as well, making it more difficult for consumers to obtain the necessary financing for major purchases such as new cars. Consumers often postpone purchasing luxury items until more favorable credit terms are available.

Consumer confidence is another important factor affecting the demand for consumer goods. Regardless of their current financial situation, consumers are more likely to purchase greater amounts of consumer goods when they feel confident about both the overall condition of the economy and about their personal financial future. High levels of consumer confidence can especially affect consumer inclination to make major purchases and to use credit to make purchases.

Overall, demand for consumer goods increases when the economy producing the goods is growing. An economy showing good overall growth and continuing prospects for steady growth is usually accompanied by corresponding growth in the demand for goods and services.

RELATED FAQS
  1. How do changes in interest rates affect the spending habits in the economy?

    Examine the factors that typically determine how consumers react to interest rate changes in terms of increasing their levels ... Read Answer >>
  2. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ... Read Answer >>
  3. What are some limitations of the consumer price index (CPI)?

    Explore some of the basic limitations of the widely used economic indicator, the consumer price index, or CPI, and examine ... Read Answer >>
  4. What economic factors affect the performance of the consumer packaged goods industry?

    Discover the various economic factors that most significantly impact the performance of companies in the consumer packaged ... Read Answer >>
  5. How should an investor interpret the consumer and business confidence index when ...

    Learn how investors benefit from watching the consumer and business confidence indexes, along with other key metrics, when ... Read Answer >>
  6. Why should an investor in the retail sector consider the Consumer Confidence Index?

    Learn how the Consumer Confidence Index works and why it is such a valuable tool for retail investors to predict future consumer ... Read Answer >>
Related Articles
  1. Investing

    Mattel Stock: 4 Things to Watch (MAT)

    Here are the four leading economic indicators that could affect shares of Mattel Inc. in the next six months, but which ones will have the most impact?
  2. Insights

    Consumer Confidence Index

    The Consumer Confidence Index is the result of a monthly survey of 5,000 U.S. households by the Conference Board that measures how optimistic or pessimistic consumers are about the economy's ...
  3. Insights

    Understanding the Consumer Confidence Index

    We look at this closely watched economic indicator to see what it means and how it's calculated.
  4. Insights

    What Does Price Level Mean?

    Price level is the average of all current prices for goods and services in an economy.
  5. Insights

    5 Factors That Could Send The United States Economy Into A Double-Dip Recession

    A decline in consumer confidence and stock market correction could be enough to sink the economy again.
  6. Investing

    Which Consumer-Related ETFs Should Investors Buy? (XLY, XLP)

    Analyze the fundamental performance and valuation of XLY and XLP to determine why XLY has grown faster. Find out which ETF is a better buy.
  7. Insights

    What is Demand?

    Demand is the economic term for the cumulative wants and desires of consumers as they relate to a particular good or service. Generally speaking, if all other factors remain constant, as demand ...
  8. Trading

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn the measures and how to analyze them.
RELATED TERMS
  1. Consumer Goods

    Products that are purchased for consumption by the average consumer. ...
  2. Consumer Discretionary

    A sector of the economy that consists of businesses that sell ...
  3. Consumer Goods Sector

    A category of stocks and companies that relate to items purchased ...
  4. Consumer Cyclicals

    A category of stocks that rely heavily on the business cycle ...
  5. Private Good

    A product that must be purchased in order to be consumed, and ...
  6. Consumer Staples

    Essential products such as food, beverages, tobacco and household ...
Hot Definitions
  1. Asset Allocation

    An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's ...
  2. IRR Rule

    A measure for evaluating whether to proceed with a project or investment. The IRR rule states that if the internal rate of ...
  3. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  4. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  5. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  6. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
Trading Center