Understanding consumer spending data

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Spending by individuals and households is an important part of the economy. Official statistics in the UK call it Household Final Consumer Expenditure (or HHFCE). Data show that UK consumer spending accounts for about 60% of GDP. So changes in the numbers have a big impact on economic growth.

The figures can be quirky. Like many official statistics, they are often revised later. It's normal to present them both in nominal money terms, and stripping out the effects of inflation.

Data for consumer spending in real terms show the underlying position much better, because the impact of price rises is taken out. These figures are variously called 'deflated' or 'at constant prices' in statistics-speak or, in the latest jargon, 'chain linked volume measures'. Seasonally-adjusted data are also calculated, because spending is traditionally much higher at certain times of the year (like before Christmas).

While consumer spending data can be valuable, one oddity is the number of significant items that are excluded from the calculation.

For example, owner occupiers' spending on mortgage interest, or indeed the cost of any sort of credit is excluded. Official statisticians attempt to estimate the implied benefit from living in your own home by reference to what it might have cost to rent your place if it were owned by someone else. Income in kind (such as a company car benefit) is apparently spending, as are costs of life assurance and pension arrangements. But buy something on eBay or a car boot sale, and it's excluded.

Excluding the cost of consumer credit still strikes one as the oddest of all, given the role that consumption financed by credit has played in the expansion and subsequent contraction in the UK, European and American economies in recent years.

Consumer spending numbers appear in the Office for National Statistics quarterly publication 'Consumer Trends', the biggest drawback to which is that the data is published so far in arrears. The first-quarter 2011 edition of this hefty 262-page publication was released at the end of June, three months after the end of the period to which it related.

It is for this reason that many observers focus more on surveys of consumer confidence. Though anecdotal, these appear more quickly and therefore provide a better indication of the current mood of consumers.

Recent experience in the UK and US also shows that consumer spending is inextricably linked with levels of existing consumer credit. Saving, the supply of consumer credit and mortgage finance, trends in residential property prices, and activity in the property market are also important.

This provides few grounds for optimism. Incentives to save are minimal with interest rates so low. Yet consumers are cautious because of the parlous economic situation and perhaps because their existing credit limits have been maxed out.

Property market paralysis, generally falling house prices and self-imposed tightness in mortgage lending are also bad news. Releasing home equity or borrowing secured against property cannot be used as a way of financing spending or to pay off expensive consumer loans, as it perhaps once was.

Spending surveys do demonstrate, though, that consumers are often illogical about spending. The good spring weather and the royal wedding 'feel-good factor' prompted a slight uptick in the earlier part of the year. But the latest data on consumer confidence suggest that this has worn off with a vengeance. The current level of confidence is about where it was at the height of the credit crunch and the 1990 recession.

There is some evidence from the data that, while still worried about the economy and financial turmoil, consumers feel better about their own finances. This suggests that some retrenching and debt repayment has gone on.

Paradoxically, of course, with sharply negative real interest rates and rising inflation, in theory this is the opposite of what consumers should be doing.

But in the current economic climate it would take a pretty brave person to borrow to finance spending on the basis that the real burden of those debts would be lightened by future inflation.