How Do Consumer Spending Trends Impact the Economy?

Consumer Spending Increased By 0.4% in August

A woman uses her credit card at a card reader reader to buy coffee at a convenience store.
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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 0.4% in August, up from the decrease in July.
  • High levels of inflation have packed a punch, causing consumers to pull back on their spending for much of the second quarter.
  • Consumer spending is a large part of GDP and economists are concerned lowered spending will continue to impact that overall number.

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.

Retail Sales

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.

Note

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.

Consumer Debt

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.

Stagnant Wages

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.

Consumer Confidence

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.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Bureau of Economic Analysis. “Personal Income and Outlays."

  2. Bureau of Economic Analysis. “National Income and Product Accounts Tables: Table 1.1.5. Gross Domestic Product."

  3. U.S. Census Bureau. "Advance Estimates of U.S. Retail and Food Services."

  4. University of Michigan. "Current Economic Conditions Index."

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