Definition
Consumer discretionary refers to goods and services that are considered non-essential, such as apparel, entertainment, and leisure products. They’re categorized as discretionary because consumers can choose whether or not to spend money on these items, typically in relation to their available income. Hence, the demand for these goods and services often increases during periods of economic prosperity and declines during economic downturns.
Key Takeaways
- Consumer discretionary refers to the sector of the economy comprising businesses that sell nonessential goods and services, including items like hobbies, luxury items, and entertainment.
- This sector typically flourishes when the economy is doing well, as consumers will have the extra income to spend on nonessential goods and services. On the contrary, it is usually the first to suffer during economic downturns, as consumers begin to cut out discretionary spending.
- Investing in consumer discretionary stocks can be a way to “bet on” economic growth. However, it also comes with its risks as these companies’ fortunes are more closely tied to the ups and downs of the broader economy.
Importance
Consumer Discretionary is an important finance term as it refers to the sector of the economy consisting of businesses that sell non-essential goods and services.
These can include items or services such as automobiles, entertainment, travel, and luxury items.
The importance lies in the fact that spending in this sector tends to increase when the economy is doing well and decrease during economic downturns.
Consumer discretionary spending provides key insights into the overall health of the economy and consumers’ confidence level.
Thus, investors and economists closely watch this sector to gauge economic trends and make informed decisions.
Explanation
Consumer discretionary is a term utilized within the scope of finance and economics that pertains primarily to the sector of the economy involving goods and services that are non-essential, yet desired by consumers if they have surplus income. These are goods and services that individuals buy when their basic needs, such as food and shelter, have been met. However, these purchases, as the term “discretionary” suggests, are optional and associated with the consumer’s choice based on discretion, as opposed to a necessity.
The spending patterns on these items can provide important economic insights, hence the relevance of this term. The purpose of defining a sector as consumer discretionary is especially advantageous for businesses, investors, and economists as it serves to reflect the economic health of the populace and the overall economy. When economic conditions are favorable and consumer confidence is high, spending on consumer discretionary goods tends to increase, signaling positive economic growth and prosperity.
Conversely, in economically turbulent times, consumers are likely to cut back on discretionary spending before decreasing spending on more essential goods or services. Therefore, trends in the consumer discretionary sector can function as a barometer for the general health of the economy, providing key indicators for economic trends and projections. Thus, the term ‘consumer discretionary’ is a vital tool in financial and economic analysis.
Examples of Consumer Discretionary
Apple Inc: One prime example of a consumer discretionary company is Apple Inc. Apple sells a variety of consumer electronics and accessories that, while popular, aren’t typically viewed as absolute necessities. Though owning a smartphone might be considered a necessity by some, opting for a high-end brand like Apple instead of a cheaper alternative falls into the discretionary category.
McDonald’s: While food is a necessary expenditure, where you choose to get that food from can fall into the consumer discretionary category. McDonald’s offers fast food at a higher cost compared to cooking at home. This means when a consumer chooses to spend their money eating here, it’s a discretionary purchase.
Time Warner: This company comes under consumer discretionary sector because it includes cable television and internet, home video (not for educational purposes), and the premium pay television and international theme parks. The consumers have the choice whether they want to avail these services or not depending on their income. If the consumer’s income decreases, they may cut back on their cable package or cancel their theme park trips. Thus, they become discretionary expenses.
FAQs for Consumer Discretionary
What is Consumer Discretionary?
Consumer Discretionary is a term from the field of economics, which refers to the sector of the economy that consists of businesses that sell non-essential goods and services. These are goods and services that consumers can avoid buying when budget constraints are tight.
What are some examples of Consumer Discretionary?
Examples of Consumer Discretionary businesses can include companies from various industries such as automobiles, household durable goods, textiles and apparel, leisure equipment, hotels, restaurants, media production and distribution, and consumer retailing and services.
Why is Consumer Discretionary important?
Consumer Discretionary is important because it serves as a barometer for the overall health and confidence of the economy. When people have more disposable income, they tend to spend more on these non-essential goods and services, which can be a sign of economic growth.
What factors can influence Consumer Discretionary?
Several factors can influence the Consumer Discretionary sector, including the overall state of the economy, unemployment levels, consumer confidence, changes in disposable income, and even weather conditions, among others.
How can I invest in Consumer Discretionary?
One way to invest in the Consumer Discretionary sector is through buying stocks and shares of companies in this industry. Additionally, there are also many Exchange Traded Funds (ETFs) and mutual funds that focus specifically on this sector.
Related Entrepreneurship Terms
- Discretionary Income
- Non-Discretionary Spending
- Cyclical Stocks
- Retail Sales
- Consumer Confidence Index
Sources for More Information
Sure, below are four reliable sources for detailed information about the finance term “Consumer Discretionary”:
