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Consumer Spending
What Is Consumer Spending?
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 [i.e., not capital goods or investment assets] 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 "supply and demand"; production of consumer goods is likewise an important piece of the supply side. Consumers decide whether to spend their income now 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.
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.
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, puts out regular data on consumer spending that goes by the name "personal consumption expenditures" [PCE]. Every year in the United States, the Bureau of Labor Statistics [BLS] conducts consumer expenditure surveys to help measure spending. Additionally, the BEA estimates consumer spending for monthly, quarterly, and annual periods.
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
The real GDP is considered a key economic indicator to watch. 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.
Article Sources
U.S. Bureau of Labor Statistics. "Consumer Expenditure Surveys." Accessed Aug. 11, 2021.
FINRA. "Key Economic Indicators Every Investor Should Know." Accessed Aug. 11, 2021.
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Economics1 of 33
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Exploring How an Economy Works and the Various Types of Economies2 of 33
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Who Created Economics?3 of 33
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Is Economics a Science?4 of 33
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The Difference Between Finance and Economics5 of 33
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Everything You Need to Know About Macroeconomics6 of 33
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Microeconomics Definition7 of 33
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Four Economic Concepts Consumers Need to Know8 of 33
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Understanding the Law of Supply and Demand9 of 33
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What Is Demand-Side Economics?10 of 33
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What Is the Supply-Side Theory?11 of 33
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What Is a Market Economy?12 of 33
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What Is a Command Economy?13 of 33
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Economic Value14 of 33
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Keynesian Economics Definition15 of 33
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How Social Economics Influences Your Future16 of 33
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Economic Indicator17 of 33
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Top Ten US Economic Indicators18 of 33
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Gross Domestic Product [GDP] Definition19 of 33
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What Is GDP and Why Is It So Important to Economists and Investors?20 of 33
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Consumer Spending Definition21 of 33
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Retail Sales Definition22 of 33
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Job Market is a Conceptual Marketplace of Employees and Employers23 of 33
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The Top 25 Economies in the World24 of 33
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What Are Some Examples of Free Market Economies?25 of 33
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Is the United States a Market Economy or a Mixed Economy?26 of 33
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Primary Drivers of the Chinese Economy27 of 33
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Japan Inc. Definition28 of 33
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How India Makes Money29 of 33
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European Union [EU]30 of 33
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How the UK Makes Money32 of 33
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