Consumer Spending: Definition, Measurement, and Importance

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.

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.