CENTER FOR BUSINESS AND ECONOMIC RESEARCH / THE UNIVERSITY OF ALABAMA
& ECONOMIC INDICATORS
Volume 68, Number 8
August 1999
Consumer Spending and Consumer Debt
The United States’ Gross Domestic
Product (GDP), the total value of all
goods and services produced in the
nation, has four major components:
•
•
•
•
Consumer spending accounted for
85 percent of that growth.
Consumer spending in 1998 was
primarily fueled by a low inflation
rate, strong job growth, strong
housing demand, and to some
extent the rise in stock market
valuations. Energy, commodity, and
import prices have been generally
low. The economy’s strong job
growth is reflected in the low
unemployment rate. Housing
demand is at an all-time high, and
the stock market continues to
exceed expectations.
private consumption,
investments,
net exports, and
government expenditures.
A big change in any of these will
alter economic activity and the rate
of economic growth. For instance, in
1998, a financial crisis and an
economic recession in most of Asia
caused economists to lower their
forecasts of the nation’s economic
growth for the year. The reasoning
was that a recession in Asia would
reduce demand in Asian markets for
U.S. exports.
Although net exports declined
(meaning higher trade deficits),
American consumer spending
increased. The economists’ low
forecasts were not entirely accurate.
U.S. exporters felt the pinch; U.S.
retailers did not.
Private consumption, or the personal
expenditures of American
consumers, is the largest of the four
components of GDP. On average, it
accounts for about 68 percent of
total GDP annually. Total inflationadjusted GDP and consumer
expenditures in 1998 were $7.5
trillion and $5.2 trillion, respectively
(in 1992 dollars). Put this way, in
1998 private consumption was
69.3 percent of GDP. However,
the contribution of consumer
expenditures to economic growth
is actually even more important than
these numbers indicate. In 1998 the
U.S. economy grew by 3.9 percent.
Consumer spending in 1998
increased by approximately five
percent in real terms. Purchases
of durable goods have been
particularly surprising. Consumers
increased their purchases of
big-ticket items by more than 12
percent. However, the increase in
consumer spending has been
accompanied by high consumer
debt levels and low savings rates.
The savings rate dipped below zero
percent and has remained at that
level in recent months. Consumer
outstanding credit reached $1.3
trillion (approximately 21 percent of
(continued on page 2)
total disposable income, or 15
percent of total nominal GDP) in
1998. Total household debt, which
on average has increased by about
$300 billion a year since 1990,
increased by almost $450 billion in
1998. This increase raised total
household debt to approximately $5.9
trillion, about 68 percent of GDP.
The spending public does not seem
to be worried about having more debt
or less savings. Recent estimates of
consumer confidence and
expectations indicate no significant
reversal in consumer spending is
expected in the near future, and both
indexes hit their historic highs in June
of 1999. Despite a spending spree,
the inflation rate at both wholesale
and retail levels has remained in
check, providing an added incentive
for consumers to spend.
Implications for Alabama
The high rate of consumer spending
has been a significant factor in the
state’s job growth during recent
2
months. From 1997 to 1998, most of
the job growth in Alabama was in the
trade and services sectors. Retail
and wholesale trade accounted for
approximately 30 percent and
services businesses accounted for
about 50 percent of the 39,600 net
new nonagricultural jobs created. In
comparison, of the nation’s 3.1
million new nonagricultural jobs, the
trade and services sectors accounted
for approximately 19 percent and 48
percent, respectively. We can see
that Alabama’s economy relies much
more on retail trade for creating new
jobs than does the U.S. economy. A
sharp downturn in consumer
spending would seriously affect the
state’s job growth.
According to a recent consumer
survey published by the U.S.
Department of Labor, average
before-tax household income in the
South was $35,691 in 1997. The
same year, the average household in
the South spent $32,226, or 90
percent of its income. One rule of
thumb tells us that disposable
Alabama Business and Economic Indicators
income usually averages about 84
percent of total income. If in the
South that number is 90 percent, it is
evident that some Southerners are
financing their purchases by sources
other than household income.
Southerners are spending their
savings, or they are borrowing more
heavily, to supplement their income.
Although no slowdown in consumer
spending is expected in the very near
future, today’s spending levels
cannot be sustained over the long
run. Several things could happen.
One scenario is that the Federal
Reserve might notch the short-term
interest rates higher if there are
significant signs of increasing price
pressures. An interest rate increase
would likely reduce both consumer
confidence and retail spending,
particularly the part of spending
being financed by consumer credit.
Slower retail spending would surely
retard Alabama’s job growth.
Ahmad Ijaz
Civilian Labor Force
Economic growth is determined by two major factors—the civilian labor force and productivity. After growing at an
extraordinary rate of 3.3 percent in 1997, the civilian labor force in Alabama declined in 1998 at an average annual rate
of 0.7 percent. This is another way of saying that most of Alabama’s economic growth in 1998 was accounted for by
increases in productivity, primarily due to automation and increased use of computer technology. In the first six
months of 1999, Alabama’s civilian labor force has increased 0.2 percent over 1998’s levels.
1998
May
2,151,600
June
2,152,200
July
2,152,100
August
2,150,300
September
2,150,400
October
2,152,000
November
2,154,200
December
2,158,800
1999
January
2,140,700
February
2,148,300
March
2,157,900
April
2,166,500
Alabama Sales Tax Collections
Sales tax revenues in the state increased by approximately $80 million from 1997 to 1998, a growth rate of 5.9 percent.
But the most recent two or three years have not seen sales taxes grow as fast as during the first four years of the
current economic expansion, which began in 1992. A slowdown in state sales tax revenues, particularly during this
period of high consumer spending, may be due to increases in catalog and Internet sales.
1998
($ millions)
May
118.121
June
122.331
July
124.188
August
117.394
September
118.168
October
123.821
November
119.467
December
129.902
1999
January
135.688
February
104.037
March
115.373
April
129.165
For more information about these and other Alabama economic indicators, please visit the CBER
Internet site at http://cber.cba.ua.edu
Center for Business and Economic Research
3
CENTER FOR BUSINESS AND ECONOMIC RESEARCH
Carl Ferguson Is Named Associate Dean and Director of CBER
Dr. Carl Ferguson has been named
Associate Dean for Research and
Technology in the University of
Alabama Culverhouse College of
Commerce and Business
Administration (C&BA). He will also
serve as Director of the Center for
Business and Economic Research
(CBER). Dean Barry Mason has
praised Dr. Ferguson’s strong
background of research and
scholarship.
Dr. Ferguson understands the
University's goal of becoming a
nationally recognized research
institution. Dr. Ferguson sees his
role as that of facilitator, to support
and nurture sponsored programs of
research in the business school.
While the new position brings
significant challenges, it also present
opportunities to showcase the
business school, its talents, and its
scholarship.
matching these opportunities to
specific persons within the college.
Dr. Ferguson points out that in
addition to the extensive research
needs of federal, state, and local
governments, the private sector is a
fertile area for sponsored research.
There are thousands of corporations
that have research needs. The keys
to success will be first, finding the
research needs consistent with our
available skill set, and secondly,
From 1975 through 1988, Dr.
Ferguson was Associate Director,
Acting Director, and Director of the
Center for Business and Economic
Research (CBER) before returning to
teaching full time. In 1995 he was
named C&BA Executive Director of
Technology and was responsible for
oversight of the Bashinsky Computer
Center; the college’s 23 multimedia
classrooms; faculty, staff, and
student workstations; and computer
networks. Dr. Ferguson now looks
forward to fostering opportunities for
research within the Culverhouse
College of Commerce.
Alabama Business is a monthly publication of the Center for Business and Economic Research, Culverhouse College of Commerce, The
University of Alabama. Articles reflect the opinions of the authors, but not necessarily those of the staff of the Center, the faculty of the
Culverhouse College of Commerce, or the administrative officials of The University of Alabama.
All correspondence should be addressed to: Editor, Alabama Business, Center for Business and Economic Research, The University of
Alabama, Box 870221, Tuscaloosa, Alabama 35487-0221.
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