What is 'Consumer Spending'

Consumer spending is another term for voluntary private household consumption, or the exchange of money for goods and services in an economy. Contemporary measures of consumer spending include all private purchases of durable goods, nondurables and services. In a purely free market, the aggregate level of private consumer spending in an economy is necessarily equal to the total market value of economic output. 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). Consumer spending can be regarded as opposed to personal saving.

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. Other economists, sometimes known as supply-siders, accept Say’s Law of Markets and believe private savings and production is more important than aggregate consumption.

BREAKING DOWN 'Consumer Spending'

Investors and businesses closely follow consumer spending statistics when making forecasts. 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.

If consumers spend too much of their income, however, future economic growth could be compromised because of insufficient savings and investment. Modern governments and central banks often examine consumer spending patterns when considering current and future fiscal and monetary policies.

Consumer Spending as an Economic Variable

Consumption of final goods (i.e., not capital goods or investment assets) is the result of economic activity. This is because individuals ultimately use these goods to satisfy their own needs and wants; economists refer to this satisfaction as “utility.”

Consumer spending is the demand side of “supply and demand"; production is the supply. When economists or policymakers refer to aggregate demand, they simply mean the combined market value of all consumer spending within a given area, over a given period of time and at a specific price level.

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.

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.

Consumer Spending as an Investment Indicator

Consumers are, 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.

In fact, the American Association of Individual Investors lists real GDP as the single most important 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.

RELATED TERMS
  1. Aggregate Demand

    Aggregate demand is the total amount of goods and services demanded ...
  2. Personal Spending Plan

    A personal spending plan, similar to a budget, helps outline ...
  3. Consumer Sentiment

    Consumer sentiment is astatistical measurement and economic indicator ...
  4. Bureau of Economic Analysis - BEA

    Bureau of Economic Analysis is a division of the U.S. Department ...
  5. Consumer Goods

    Consumer goods are the products purchased by the average consumer. ...
  6. Deficit Spending

    Deficit spending occurs whenever a government's expenditures ...
Related Articles
  1. Investing

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn how to analyze them.
  2. Insights

    Consumer Confidence Index

    The Consumer Confidence Index is the result of a monthly survey of 5,000 U.S. households by the Conference Board that measures how optimistic or pessimistic consumers are about the economy's ...
  3. Insights

    Can Keynesian Economics Reduce Boom-Bust Cycles?

    Learn about this famous British economist's proposed solution to a widespread economic problem.
  4. Insights

    Explaining The World Through Macroeconomic Analysis

    From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone.
  5. Personal Finance

    50 Years Of Consumer Spending

    Financially, decade has it MUCH worse than our parents and grandparents did, right? You may be surprised.
  6. Insights

    Will Consumer Spending Save the Economy? (FIT, CZR)

    This week will hold incredibly important clues to the state of the American consumer. Be prepared.
  7. Insights

    Why Consumers Are the Biggest Threat to the Economy

    American consumers, who account for two-thirds of economic activity, are simply not spending and thus threatening the economy's revival.
  8. Insights

    How To Read The Michigan Consumer Sentiment Index

    The Michigan Consumer Sentiment Index has provided a key leading indicator for investors and economists for decades. This respected index is published monthly from the results of random telephone ...
  9. Insights

    What's the Economy?

    The economy is the production and consumption activities that determine how scarce resources are allocated in an area.
RELATED FAQS
  1. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  2. How Do Fiscal and Monetary Policies Affect Aggregate Demand?

    Learn about the impact fiscal and monetary policy have on aggregate demand, and discover how the government influences economic ... Read Answer >>
  3. Are Social Security payments included in the US GDP calculation?

    Understand how gross domestic product is calculated and whether or not transfer payments such as Social Security are included ... Read Answer >>
Trading Center