Wants vs. Needs

Recent economic data from the Commerce Department indicates that consumers are beginning to spend again as we emerge from the longest recession since the Depression. Consumer spending accounts for 70% of the demand in our economy. So, the 0.6% increase in consumer spending in March might be cause for celebration.

Wages, as measured by the Labor Department’s employment cost index, rose 0.2% from February’s level. But personal income rose by just 0.3% in March.

What does this mean? Consumers are likely reaching into their wallets for their credit cards in order to pay for purchases. In fact, the personal savings rate fell from 3% to 2.7%, the lowest level since September 2008.

So, once again consumers appear to be spending beyond their means. We know this is not sustainable and we know how this story ends.
Perhaps we need to remind ourselves of the difference between a “need” and a “want.” A need is something that we need to exist. Food, water, clothing, and shelter all come to mind. A want is something that … well, we want. We want new cars, a Hawaiian vacation, a new HD TV … Do we need these things? Clearly we do not.

There is nothing wrong with buying things we want, unless this impairs our ability to save for the future. If we don’t save for the future, we will be hard pressed to pay for our needs, much less our wants.