The success of your small business is based in part on some external factors that you can’t control, including the state of the economy. When economic indicators are favorable, people earn more money, have more disposable income, and are more willing to buy, which is a good thing for your business. Understanding the four major categories of expenditures can help you anticipate upward and downward trends so you can adjust your marketing, inventory, and operational strategy to account for these changes.
Personal consumption refers to the number of durable goods, non-durable goods, and the services that people have bought. Durable goods are built to last more than a year, and non-durable goods are made to last less than a year. In contrast, services don’t have a built-in expiration date. Cars and computers are examples of durable goods, and clothes and food are examples of non-durable goods. Banking is an example of a service that isn’t affected by the passage of time. If personal consumption is trending upward and you sell durable goods, non-durable goods or a service, you may want to increase your marketing spend to take advantage of increased demand.
Some of the activities that factor into investment include the number of residential home sales, the amount of money in the stock market, money market accounts, and savings, and the amount of business inventory. If investment levels are in sharp decline, that could be a sign that a recession is approaching, and that individuals and businesses don’t have the disposable income to invest in real estate and the industrial sector.
Economists calculate net exports by taking the total of all exports and subtracting all imports. Exports are defined as the number of goods and services made in the U.S. that foreign individuals and foreign businesses have bought. However, because the U.S. also imports goods and services, the only real way to know net exports is to deduct import purchases. It’s not uncommon for the U.S. to have a deficit in net exports, because the country imports more goods and services than it exports. If net exports are trending positive, it could give you the impetus to explore an untapped foreign market for your products and services.
Local and state governments, as well as the federal government, spend money to buy goods and services just like individuals and small businesses. Two of the largest federal government expenditures are for defense and education. When the government spends more than it takes in taxes and other sources of revenue, it increases the deficit and can lead to higher interest rates, which means that individuals and small businesses wanting loans or credit will need to pay more for that privilege.
