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Consumer Spending

What You Buy Every Day Is THE Most Important Thing to Growth

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Pedestrians walk by a luxury goods store along a main shopping street in the wealthy town of Greenwich where in 2006 the median price for a single-family home was $1.7 million on September 15, 2010 in Greenwich, Connecticut.

Photo: Spencer Platt/Getty Images

Definition: Consumer spending is purchases made by households and individuals to fulfill everyday needs, wants and desires. 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 of what we spend is for services, mostly 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.

About a third of our money goes towards goods. This includes so-called durable goods, such as washing machines, automobiles and furniture, as well as non-durable goods, such gasoline, groceries and clothing. (Source: Bureau of Economic Analysis, Personal Consumption Expenditures)

Current Consumer Spending Statistics

The Bureau of Economic Analysis measures consumer spending, which it calls Personal Consumption Expenditures (PCE).  It's reported monthly, which means it can give an early indication of that quarter's real GDP, which isn't released until later. Here's where you can find other Leading Economic Indicators.

For example, PCE dropped from $10.844 trillion in December 2013 to $10.813 trillion in January 2014. Although levels improved to $10.916 by March, it had already taken its toll. GDP fell 2.4% in the first quarter. For this month's data, see PERSONAL INCOME AND OUTLAYS. Table 2.8.6. Real Personal Consumption Expenditures by Major Type of Product, Monthly, Chained Dollars 

Here's the most recent quarterly data for the most important categories to give you an idea of what's measured and how important it is to consumer spending.

CATEGORY SPENT IN Q1 2014 (Trillions) % OF PCE
Services     $7.151    65.8%
    Housing, utilities     $1.992    18.3%
    Healthcare     $1.802    16.6%
    Financial and Insurance     $0.683      6.3%
    Other(Internet access, cable)     $0.775      7.1%
  Non-Profit Services     $0.913      8.4%
Goods     $3.708    34.1%
  Nondurable goods     $2.364    21.8%
    Food/drink in Restaurants, Hotels     $0.825      7.6%
    Personal care products     $0.933      2.5%
  Durable Goods (autos, furniture, electronics)     $1.362    12.5%

(Source: BEA, GDP and Product Accounts Tables, Table 2.3.6. Real Personal Consumption Expenditures by Major Type of Product, Chained Dollars)

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, and borrowing to 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. 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. That's why the primary mandate of the nation's central bank, the Federal Reserve, is to ward off inflation.

Worrying Trends

Consumer spending drove more than 70% of the U.S. economy until the 2008 financial crisis. Since then, it's drifted down to 68%. There's several reasons for this worrying trend. 

First, there's been a drop-off in spending on automobiles, and other forms of transportation. The auto industry took a major hit during the recession, as people put off purchases of big-ticket items like cars. 

Second, U.S. retail sales have also taken a hit. In 2013, Black Friday sales fell 2.7%, the first downturn since the recession. For more, see Holiday Shopping Was Not Merry.

Instead of shopping, many people went back to school to find new careers. Credit card debt fell, and education loans rose to their highest levels in history. For more, see Consumer Debt.

Consumer spending trends show a definite move toward online shopping versus brick-and-mortar stores. The internet keeps prices down, which also depresses total consumer spending figures.

Most important, rising income inequality has hurt consumer spending. Average income levels have not kept pace with either the stock market or GDP. As  result, households have cut back on spending and increased saving. Article updated July 25, 2014

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