Answer:
Consumer spending is what households spend to fulfill everyday needs. This private consumption includes both goods and services.1 Every one of us is a consumer. The things we buy every day create the demand that keeps companies profitable and hiring new workers.2
Almost two-thirds of consumer spending is on services, like real estate and health care. Other services include financial services, such as banking, investments, and insurance. Cable and internet services also count, as do services from non-profits.
The remaining one-third of our personal consumption expenditure is on goods. These include so-called durable goods, such as washing machines, automobiles, and furniture. More frequently, we buy non-durable goods, such as gasoline, groceries, and clothing.34
Five Determinants of Consumer Spending
There are five determinants of consumer spending. These are the things that affect how much you spend. Changes in any of these components will affect consumer spending.
The most important determinant is disposable income.5 That's the average income minus taxes.6 Without it, no one would have the funds to buy the things they need. That makes disposable income one of the most important determinants of demand. As income increases so does demand. If manufacturers ramp up to meet demand, they create jobs. Workers' wages rise, creating more spending. It's a virtuous cycle leading to ongoing economic expansion. If demand increases but manufacturers don't increase supply, then they will raise prices. That creates inflation.
The second component is income per capita. It tells you how much each person has to spend. Income measurements might rise just because the population increases. Income per person reveals whether each person's standard of living is also improving.
Income inequality is the third determinant of spending. Some people's income may rise at a faster pace than others. The economy benefits when most of the gain goes toward low-income families. They must spend a more significant share of each dollar on necessities until they reach a living wage. The economy doesn't benefit as much when increases go toward high-income earners. They are more likely to save or invest additions to income instead of spending.
The fourth factor is the level of household debt. That includes credit card debt, auto loans, and school loans. Current consumer debt statistics show that household debt has reached new record levels.11 Surprisingly, high health care costs are one of the biggest causes of overwhelming debt.
The fifth determinant is consumer expectations. If people are confident, they are more likely to spend now. The Consumer Confidence Index measures how confident people are about the future.13 It includes their expectations of inflation. If consumers expect inflation to be high, they will buy more now to avoid future price increases. That's why the Federal Reserve targets a 2% inflation rate.
