Economics and the Fluctuation of Consumer Behavior

The economy is greatly influenced by the people who contribute to it. The US economy is made up of approximately 70% consumer spending. This means that what and how much people are buying is an important aspect of the state of the nation. Depending on the country's circumstances, consumer behavior can fluctuate and cause either a positive or negative influence. For this reason, it's crucial to keep track of consumer sentiments and behavior.

What Can Impact the Economy?

While many factors can cause economic movements, here's a few that regularly cause shifts:

Supply and Demand – When demand for products is high, supply will decrease, and prices will increase. When demand is low, the opposite will be true.

Interest Rates – High interest rates can cause consumers to spend less, making it more difficult to make large purchases. With higher interest rates, the average consumer might not have the ability to afford a home or take out a loan.

Inflation – This tends to impact everyday items and can make things that used to be fairly inexpensive run at a higher price. Inflation can cause the value of a dollar to decrease, forcing the prices of goods and services to increase.

Unemployment – A high rate of unemployment usually coincides with poorer economic performance as there will be more people without an income able to contribute to the economy.

Although this isn't a definitive list, these examples can greatly impact the way Americans can contribute to the economy, and certain major events can amplify these effects.

Major Events

When things like recessions, pandemics, or other major events take place, it can cause some of the above examples to take a significant toll on the economy. For example, during the early days of the COVID-19 pandemic, many businesses were required to shut down and many were impacted by lockdown measures, limiting the amount of goods and services available to the public. According to the National Bureau of Economic Research, the US hit an economic peak in February of 2020, putting a halt to over a decade of expansion. In September of 2020, the US saw the largest decline in economic output ever recorded, proving how vital consumer spending is to economic health.

Additionally, nearly every industry saw a drop in stock performance in 2020, showing how much correlation there really is between the way consumers spend and how well the markets are able to perform.

How This Affects Consumer Behavior

Consumer confidence can sway investors one way or the other as how the public feels about certain companies, products, and services can indicate success in a particular industry or sector. When outlook is bad and the public is showing low confidence, it's likely that stock prices will drop across the board. The way consumer behavior fluctuates is an important thing to track, as it can show investors what the near future of the markets will look like, and can provide a better idea of how they should act. Heading back to the COVID-19 example, many Americans lost their jobs, putting the unemployment rate at 14.8%, the highest rate in history. Even as time went on, the unemployment rate struggled to find its way back to a pre-COVID level, keeping the economy in a tough position.

As we began to see businesses and offices reopen, people returning to their pre-COVID routines, we also began to see the economy recover—although, even as COVID is no longer considered a health emergency, we can still feel the effects of the pandemic today. Inflation and high interest rates as a result of shortages across several sectors is putting a strain on Americans, affecting the CPI, and in turn, causing fluctuations in stock prices. What does this mean for investors? Keeping a close eye on consumer surveys can give investors a good idea of how they should react when making investment decisions. But, it's always important to keep in mind that the stock market can be unpredictable, and there's no way to guarantee profit—all investments involve risk, no matter how much you examine and analyze things like trends, consumer behavior, and economic performance.

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