Because consumer spending is such a large component of GDP, it is a leading economic indicator. If spending is flat, economic growth may also be anemic, which can increase recession fears. Beyond forecasting the economy, consumer spending statistics also help retailers evolve in a way that appeals to consumers so they can remain in business.
By the Numbers
- Consumer spending, also known as personal consumption expenditures (PCE), increased 0.2% in May, less than 0.6% from April and the 0.4% economists expected.
- High levels of inflation have packed a punch, causing consumers to pull back on their inflation-adjusted spending for the first time this year.
- To read more on economists' reactions to the most recent consumer spending numbers, see our coverage of the latest report from the Bureau of Economic Analysis.
History of Consumer Spending
Strong consumer spending is the main reason the GDP growth rate has been within a healthy range of 2% to 3% since the Great Recession (not counting the pandemic-induced short recession in 2020). As the table below shows, consumer spending has remained close to that healthy range since 2010, following the financial crisis.
For August 2022, preliminary estimates of seasonally adjusted retail show sales increased 0.3% from the previous month. Sales were up 9.1% from the same month last year, and total sales from June through August were up 9.3% from the same period a year ago.
How Retailers Have Responded to Changing Consumer Expectations
Retailers now have to contend with shoppers who expect high value combined with low prices. As a result, Amazon and other online stores have stolen business from brick-and-mortar stores. Companies that depend exclusively on a low-cost or high-value competitive advantage have fallen behind. Instead, retailers today must provide both.
Those companies that don't strike the right balance between value and price could lose their customers permanently.
Factors That Affect Consumer Spending
For business owners looking for ways to appeal to consumers, three trends should factor into their planning.
Cars, mortgages, credit card balances, and student loans make up a large portion of consumer debt. Spending drops when consumers take on too much debt or when they lose jobs based on economic circumstances. When the economy recovers, the unemployment rate goes down, and consumers have more money to spend.
Average income levels have not kept pace with growth in either the stock market or GDP. That's partly because jobs have been outsourced to cheaper labor in China, India, and low-wage manufacturing in Asia. Despite changes to the North American Free Trade Agreement and other free trade agreements, some manufacturers may still cut jobs locally and hire abroad. Employees who lose jobs may have to cut back on spending and increase their savings to make up for income shortfalls.
Many analysts look to the Consumer Confidence Index, a measure of how Americans feel about the economy, to predict how likely it is that consumers will spend. People are more likely to shop when they feel confident about their ability to get a more lucrative job. Until the 2020 recession, numbers were inching higher. In August 2021, consumer confidence hit its lowest level since April 2020. Perhaps due to fears of rising inflation as well as COVID-19 variants, this figure has continued to drop into 2022.