Consumer spending, which makes up about 68% of the United States’ gross domestic product, is the total money spent by individuals and households on goods and services for personal use and enjoyment. Consumer spending is a major factor in driving an economy and a critical concept in economic theory.
What is Consumer Spending?
When looking at consumer spending, it is a big component to the demand side of the economic principle of “supply and demand”. Production of goods is part of the supply side. Consumers decide what amount of their disposable income to spend now or in the future. Consumer spending is when a consumer spends on consumption now. What money is not spent now for consumption and for future spending is known as savings. Durable goods, nondurable goods, and services are all measured for consumer spending. Durable goods are consumer goods that usually have a life span of over three years and can be used repeatedly throughout that time. Nondurable goods, however, are consumed in less than three years and usually used once.
Economics and Consumer Spending
Consumer spending has ties to the field of economics, which is the study of the economy or the part of society that creates wealth. John Maynard Keynes, regarded as the founder of modern macroeconomics, founded what is known as Keynesian economics. He believed that consumer spending was the most important short-run determinant of economic performance and the primary component of aggregate demand, which is the total demand for goods produced domestically (consumer goods, services, and capital goods). Jean-Baptiste Say, through Say’s Law of Markets, believed private savings and production is more important than aggregate consumption. He stated that if consumers spend too much of their income now, economic growth in the future could be compromised due to insufficient savings and investment.
Metrics
Governments, central banks, and businesses examine consumer spending through different metrics that track consumer spending. Gross domestic product (GDP) is often used to track consumer spending, which accounts for 68% of total GDP. Real GDP, which is adjusted with inflation, is another metric used. The Bureau of Economic Analysis (BEA), part of the Department of Commerce, releases regular data on consumer spending that is called, “personal consumption expenditures” (PCE). Governments, local and federal, and central banks pay close attention to these metrics and consumer spending patterns to consider current and future fiscal and monetary policies. Businesses pay close attention to consumer spending patterns because for their business to do well, customers need to spend money to buy their products.
First State Investment Advisors pays close attention to consumer spending to invest in the right companies. For a free consultation, call today at (918) 492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.