When men are employed, they are best contented; for on the days they worked they are good-natured and cheerful, and, with the consciousness of having done a good day's work, they spent the evening jollily; but on our idle days they were mutinous and quarrelsome.
—Benjamin Franklin, Autobiography, 1793, Chapter X
Consumer spending is perhaps the most important of all business forecasts. The consumption of goods and services accounts for approximately two-thirds of gross domestic product (GDP), and it is typically the first topic that my investor clients wish to discuss. A national consumer spending projection is a key starting point for most marketing studies and, during my career, expected consumer spending has generally been the issue separating optimists from pessimists.
I am usually optimistic about consumer spending. I agree with pessimists that the American consumer should be saving more for rainy days and retirement. However, when forecasting I always distinguish how I believe households and firms should behave versus what they are likely to actually do. Moreover, I often disagree with pessimists about potential purchasing power and the American standard of living. For instance, although some observers fret about the domestic jobs lost to outsourcing, I focus more on what the accompanying cheap imports mean for purchasing power.
In this chapter, the challenge of making accurate consumer spending forecasts is approached from both the ...