Consumer Spending

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Blog Author :

Nanditha Saravanakumar

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Consumer Spending Definition 

Consumer spending is the total amount of money the public spends on goods and services for personal or non-business use. It is the monetary value of gross private consumption. It has the potential to strengthen and weaken the economy. Thus, it is a significant economic indicator and reflects a nation's health. 

What is Consumer Spending?

Consumer spending is the most important determinant of aggregate demand and forms a large chunk of a nation's GDP. Therefore, the role of spending is extremely consequential, and the government, along with the central bank, constantly monitors the spending situation and often controls it through various economic policy measures.

Table of contents
  • Consumer spending is the total value of the goods and services end consumers use in the economy. In simple words, it is the total value of private consumption.
  • • The government collects the data on consumer spending to assess the consumption patterns and spending to evaluate the economic situation. It also takes steps to propel or recede the spending through monetary policies introduced by the country's central bank.
  • High spending denotes that most people in a country are well-off and can meet their needs sufficiently, while low spending means that its people are financially struggling.

Consumer Spending Explained 

Consumer spending depicts the financial situation of every individual in a country. It influences other economic parameters, like demand, employment rate, national income or GDP, inflation, etc. First, let's understand the spending mechanism. 

When most people have a good financial situation, they can spend more and meet more than their basic requirements. For example, people can buy extra clothes, snacks, or electronic devices with a certain increase in disposable income. Hence, the demand for these goods increases, and businesses start producing and selling more.

An increase in demand contributes to high prices. This leads to inflation in the economy. Prolonged periods of inflation become harmful to the people as they will not be able to meet their needs. Therefore, the government has to stop inflation at a certain limit by reducing consumption.

Consumer Spending & Monetary policy

The central bank can do this by initiating a contractionary monetary policy. The most common measure is increasing loan interest rates to discourage people from borrowing and spending money. Also, selling government securities can encourage purchases by citizens, which they would otherwise spend on economic activities. Further, increasing commercial banks' reserve requirements can reduce the amount the banks can loan to consumers. 

These measures reduce consumption as the government intends. However, decreased spending can lead businesses to cut off expenses due to reduced sales. As a result, many people lose their employment. This, added to the low spending power of people, can negatively affect the economy. Hence, the central bank institutes the expansionary monetary policy.

The expansionary monetary policy aims to increase spending by lowering loan interest rates to encourage people to borrow money and spend. However, the government also injects money into the economy to propel stagnant commercial activities. 

Thus, one can see that private consumption is an influential element in an economy and is always under government watch. The data on consumer spending is constantly collected by the government and is made public too. 

For example, consider the case of the United Kingdom. The U.K. consumer spending data is collected by the Office for National Statistics and is published regularly. The most recent report, published on June 30, 2022, shows the U.K. consumer spending trends and consumption patterns from January to March 2022. Like this, most countries publish their consumption data.

However, it is necessary to remember that the purchases, investments, or expenses of the businesses in a country are not considered private consumption. Nevertheless, they contribute to the gross domestic product of the country.

Examples

Having understood the concept of consumption and spending, let's discuss some examples.

#1 - United States

Personal consumption expenditure forms an estimated 70% of the U.S. GDP. The Bureau of Economic Analysis compiles and publishes the consumer spending report monthly, quarterly, and annually. According to the current release, the consumption in May increased by 0.2% over April. 

#2 - Australia

The Australian Bureau of Statistics is the government organization that collects and analyses consumption data. It publishes a comprehensive report showing the consumer spending index, the category-wise and state-wise consumption. The total spending in Australia increased by 7.9% throughout the year in May 2022. 

#3 - China

China's National Bureau of Statistics (NBS) collects and evaluates household income and expenditure data in the country. The organization recently released the data for the first half of 2022. According to the consumer spending report, the total per capita expenditure was CNY 11,756 or $1740. The report also shows the category-wise expenditure.

#4 - India

The Ministry of Statistics and Programme Implementation is authorized to collect data on private final consumption expenditure in India. In Q2 2022, according to the consumer spending index, the total consumption value was $22,624, and the estimated growth in Q2 spending is 7.7%.

Frequently Asked Questions (FAQs)

Why is consumer spending important to the economy?

Private consumption is a significant macroeconomic factor because it affects many facets of the economy. For example, it influences parameters like aggregate demand, employment, interest rates, inflation, etc. Therefore, it is a very important economic and financial indicator.

What per cent of GDP is consumer spending?

Private consumption is often the major component of GDP. However, there is no definite proportion of consumption to GDP. Often it depends on the focus of a specific country. That is, for a developed nation, it will be higher. For example, in the U.S., the private consumption to GDP is at 70%, while for developing nations, the percentage will be lower as they also focus on international trade, especially exports. 

How does consumer spending change during a recession?

A recession is not a favorable situation for any economy. Therefore, almost all the economic parameters look dull during a recession. Hence, most people will not be in a situation to spend more. Thus, it can be said that private consumption will usually be less during a recession.