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.