Consumer spending is the total money spent on final goods and services by individuals and households for personal use and enjoyment in an economy. Contemporary measures of consumer spending include all private purchases of durable goods, nondurable goods, and services. Consumer spending can be regarded as complementary to personal saving, investment spending, and production in an economy.
Key Takeaways
- Consumer spending is all spending on final goods and services for current personal and household use.
- Consumer spending is a key driving force in the economy and a critical concept in economic theory.
- Investors, businesses, and policymakers closely follow published statistics and reports on consumer spending in order to help forecast and plan investment and policy decisions.
Understanding Consumer Spending
Consumption of final goods is the result of and ultimate motivation for economic activity. This is because all goods that are consumed must first be produced. Consumer spending is a major component of the demand side of the supply and demand that shape the market. Production of consumer goods is likewise an important piece of the supply side. While consumers decide whether to spend their income in the present or in the future, consumer spending typically only refers to spending on consumption in the present. Income retained for future spending is called saving, which also funds investment in the production of future consumer goods.
Many economists, especially those in the tradition of John Maynard Keynes, believe consumer spending is the most important short-run determinant of economic performance and is a primary component of aggregate demand. Consumer spending is the largest component of Gross Domestic Product (GDP) and the target of Keynesian fiscal and monetary policy in macroeconomics. Other economists, sometimes known as supply-siders, accept Say's Law of Markets and believe private savings and production are more important than aggregate consumption. If consumers spend too much of their income now, future economic growth could be compromised because of insufficient savings and investment.
Measuring Consumer Spending
Modern governments and central banks often examine consumer spending patterns when considering current and future fiscal and monetary policies. Consumer spending is often measured and disseminated by official government agencies. In the United States, the Bureau of Economic Analysis (BEA), housed in the Department of Commerce, publishes regular data on consumer spending, under the technical term "personal consumption expenditures" (PCE). Additionally, the BEA estimates consumer spending for monthly, quarterly, and annual periods. Every year in the United States, the Bureau of Labor Statistics (BLS) conducts consumer expenditure surveys to help measure spending, as well.
Most official aggregate metrics, such as gross domestic product (GDP), are dominated by consumer spending. Others, including the much newer gross domestic expenditures (GDE) or "gross output" (GO) reported by the BEA, also include the "make" economy and are less influenced by short-term consumer spending. By its very nature, consumer spending only reveals the "use" economy, or finished goods and services. This is distinguished from the "make" economy, referring to the supply chain and intermediate stages of production necessary to make finished goods and services
Consumer Spending as an Investment Indicator
Consumer spending is, naturally, very important to businesses. The more money consumers spend at a given company, the better that company tends to perform. For this reason, it is unsurprising that most investors and businesses pay a great amount of attention to consumer spending figures and patterns. Investors and businesses closely follow consumer spending statistics when making forecasts.
As a result, the real GDP, which reflects the value of all goods and services produced by an economy in a given year, is a closely-watched key economic indicator. If consumers provide fewer revenues for a given business or within a given industry, companies must adjust by reducing costs, wages, or innovating and introducing newer and better products and services. Companies that do this most effectively earn higher profits and, if publicly traded, tend to experience better stock market performance.
What Is the Most Important Determinant of Consumer Spending?
The key factor that determines consumer spending is income and employment. Those who have steady wages have the ability to make discretionary purhcases, thereby generating demand. Other factors include prices, interest, and general consumer confidence.
What Are the Three Largest Categories of Consumer Spending?
The largest category of consumer spending in the U.S. is housing, which accounted for 33.3% of total annual expenditures in 2022, according to the latest data available from BLS. Transportation followed at 16.8% of total expenditures, and food at 12.8%.
How Does Consumer Spending Lead to Inflation?
Generally speaking, higher household incomes can drive consumer spending and stimulate aggregate demand. In response, businesses often raise prices for goods and services, which can lead to inflation.
The Bottom Line
Consumer spending refers to total spending on goods and services for personal and household use. This does not include spending on capital goods, which are good purchased by firms to produce consumer goods down the line, nor does it include money saved for future spending. As an indicator, consumer spending greatly reflects the current level of demand in a market; it's often interpreted as a determinant of economic performance. Businesses and policymakers alike monitor consumer spending metrics to forecast and inform investment and policy decisions.
