Influence of Economics on Household Decision Making
Any decision on big purchase whether it is a house or a car should consider and evaluate the current economic circumstances and potential trends in the most crucial economic indicators. The chart below illustrates how GDP changes and Personal Consumer Expenditure trend correlate.
As it can be observed from the line diagram above, growth in GDP did not always match the same trend in Personal Consumer Expenditure. For instance, in 2011 GDP grew but PCE dropped, and in 2012 vice versa GDP fell down but PCE continued to grow. It is a true fact that GDP affects the PCE significantly, however, such factors as fluctuations in interest rates, difficult in borrowing money with financial institutes, and low confidence of the consumers also impact PCE.
According to the Bureau of Labor Statistics (2015) the Consumer Price Index (CPI) indicates the average change in the prices for goods and services which consumers purchase for their living. As it is observed from the line diagram the trend in CPI is upward, meaning that prices grow each consequent year.
As it is stated by the Board of Governors of the Federal Reserve System (2017), the federal funds rate is figure which is considered the main interest rate valid at the U.S. financial market. The Federal funds rate has an impact on other types of interest rates in particular the prime rate (interest rate that financial institutions propose to the clients with better credit ratings). Moreover, it affects such longer-term interest rates as loans, mortgages, and savings indirectly, thus influencing consumer wealth and confidence. As it is seen from the line diagram above, the federal funds rate has the tendency to move below 1 percent if to analyze 30 years period.
In 2017, Federal funds rate is equal to 0,66, while when I took the car loan it accounted for 0,09 percent that was one of the minimal federal funds rate for the analyzed period (a minimal score was 0,07 in 2011). I was interested in purchasing Honda Accord because it was included into the list of EPA certified “SmartWay” vehicles according to the U.S. Department of Energy (2017). As it was indicated by the US Bank (2017) it could provide up to 0,5 percent in loan rate decline for such “green” cars. As I bought a new car I have received 0,33 percent in loan rate reduction and my car loan rate in April 2014 was equal to 4,11 percent. Honda Accord was worth $26,550, I made 15 percent of down payment - $3, 983. US Bank approved a car loan for $22,568 for a 5-year period of repayment.
Currently, US Bank can propose such low loan rates as 2,87 percent for the clients with excellent credit ranking. But this rate is for the loan shorter in length less than 36 months. This US Bank trend in interest rate decrease is confirmed by National statistics on car loan presented by Federal Reserve Bank of St. Louis (2017). …
