Consumer Spending and Its Impact on the Economy
What You Buy Every Day Drives U.S. Economic Growth
Consumer spending is what households buy to fulfill everyday needs. This includes goods and services. Every one of us is a consumer. The things we buy every day create the demand that keeps companies profitable and hiring new workers.
Nearly two-thirds includes services like real estate and healthcare. Other services include financial services (such as banking, investments, and insurance), cable and internet services, and even services from non-profits.
For more, see Consumer Spending Trends and Statistics.
The remaining one-third of our spending is on goods. These include so-called durable goods, such as washing machines, automobiles, and furniture, as well as non-durable goods, such gasoline, groceries, and clothing. For more, see Personal Consumption Expenditures.
Five Determinants of Consumer Spending
There are five determinants of consumer spending. The most important determinant is . That's the average income minus taxes. Without it, no one would have the funds to buy the things they need. Disposable income is also one of the most important determinants of demand. Without it, no one would buy anything. Instead, everyone would just save their excess income until they found something they wanted.
You also want to look at income per capita, because that tells you how much each person has to spend.
Income inequality trends are also significant.
That's because rising income may not be distributed equally. Lower income families must spend a greater share of each dollar on necessities until they reach a living wage. Higher income earners may keep spending the same, and put extra income into investments.
The fourth factor is the level of household debt.
The fifth determinant is consumer expectations. If people are confident, they are more likely to spend now. Here's the latest Consumer Confidence Index.
It also includes their expectations of inflation. If consumer expect inflation to be high, they will buy more now to avoid future price increases. That's why the Federal Reserve targets a 2 percent inflation rate.
Why It's Important
Consumer spending is the single most important driving force of the U.S. economy. If you doubt this, think about what would happen if everyone boycotted everything. Businesses would eventually go bankrupt and lay off workers. The government would then have no one to tax.
The only thing left would be exports, assuming other countries kept up their consumer spending. Borrowing would keep the government and factories open. In fact, these are other factors of economic production are nowhere nearly as important as consumers spending. For more, see Components of Gross Domestic Product.
Even a small downturn in consumer spending can damage the economy. As it drops off, economic growth slows.
However, too much of a good thing can be damaging, too. When consumer demand is greater than businesses' ability to provide the goods and services, prices can increase. If this goes on, it can create inflation. If consumers expect ever-increasing prices, they will spend more now. That further increases demand and business raise their prices. It becomes a self-fulfilling prophecy that is very difficult to stop. That's why the primary mandate of the nation's central bank, the Federal Reserve, is to ward off inflation.
How Consumer Spending Is Measured
Consumer spending is measured in many different ways. The most comprehensive is the monthly Personal Consumption Expenditures report.
The is released in August each year by the Bureau of Labor Statistics. It is similar to the PCE, but has a little more detail about types of households. That's because the BLS analyzes data from the U.S. Census. The BLS releases its report in September each year. Here's the most .
Consumer debt tells you what people are borrowing to buy. A large portion is for automobiles.