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Consumer Spending

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Consumer Spending
Definition: Consumer spending drives 70% of the U.S. economy. Every one of us is a consumer. The things we buy every week - groceries, gasoline, clothing - create the demand that keeps companies making products. These products are sold to consumers through retailing.

Consumer spending also includes services, such as real estate and health care. Other important consumer services are financial services, such as banking, investments, and insurance.

Consumer spending can damage the economy. If it drops off, economic growth will slow. Prices will drop, which creates deflation. If slow consumer spending continues, the economy can go into a recession.

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. This further increases demand, and inflation. It becomes a self-fulfilling prophecy that is very difficult to stop. The Federal Reserve's primary mandate is to ward off inflation.

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