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October 2, 2020
Introduction to the U.S. Economy: Consumer Spending
Consumer spending is a key driver of short-run economic
result of business closures, social distancing, and other
growth in the U.S. economy. During the initial months of
measures taken to limit the spread of the virus.
the Coronavirus Disease 2019 (COVID-19) pandemic,
consumer spending dropped at a rapid and historic rate.
Figure 1. Real Personal Consumption Expenditures
This In Focus provides an overview of consumer spending,
Q1 2005 - Q2 2020
summarizes recent trends, describes its relationship with the
business cycle, and discusses policy that can impact and be
affected by consumer spending.
How Consumer Spending Is Measured
As defined by the Bureau of Economic Analysis (BEA),
consumer spending, also referred to as personal
consumption expenditures (PCE), is the value of the goods
and services purchased by, or on the behalf of, persons
(households and nonprofit institutions serving households)
living in the United States. PCE comprises roughly two-
thirds of gross domestic product (GDP) and is therefore
typically a large component of short-run economic growth.
BEA provides PCE data monthly and measures these
expenditures in relation to personal income and prices.
Transactions included in the calculation of PCE consist
Source: Bureau of Economic Analysis (BEA).
largely of the purchases of new goods and services by
Note: Seasonal y adjusted at annual rates.
households, among others. BEA measures the values of
expenditure transactions, including sales and excise taxes.
Consumer Spending and the Economy
Measuring consumption expenditures against income
Patterns of consumer spending can be linked closely with
allows for a comparison of how much consumers spend
broader economic conditions, specifically the business
versus save. Tracking what people buy and how much they
cycle and economic growth.
spend allows BEA to also track fluctuations in price levels,
referred to as inflation in the case of rising prices. One of
The Business Cycle and GDP
the most widely used sources for measuring inflation is
Consumer spending generally follows the pattern of the
BEA’s PCE Price Index. Real PCE (PCE adjusted for
business cycle. During economic downturns, consumer
inflation) is calculated by adjusting PCE by the price index.
spending typically decreases as unemployment increases
Recent Trends in Consumer Spending
and personal income decreases. In contrast, during
expansions, consumer spending increases as unemployment
Figure 1 shows the pattern of real PCE in the United States
decreases and personal income increases. A strong
between the first quarter of 2005 and the second quarter of
economy can impact consumer sentiment and spending.
2020. The total personal consumption expenditure data is
Consumer confidence due to economic conditions may
additionally shown broken out into spending in two main
increase purchases of durable goods (goods that can be used
categories, goods and services. Expenditures of both goods
over a long period of time), such as vehicles or major
and services have increased steadily since 2005, except
appliances.
during the financial crisis and recession of 2007-2009 and
the current recession caused by the COVID-19 pandemic.
In general, spending on durable goods is more cyclical than
Expenditures on services were consistently 30%-50%
spending on nondurable goods (goods that are “single use”
higher than expenditures on goods until 2020, when that
or are consumed over a short period of time). Therefore,
gap began to close due to falling expenditures on services.
spending on durable goods should decrease relatively more
in a recession as, in theory, individuals have the ability to
In 2020, PCE dropped by a non-annualized 6.6% in March
put off big purchases, such as household appliances, until
and 12.6% in April—notably large monthly decreases. Still,
the economy improves or the need becomes sufficiently
real PCE remained higher in the second quarter of 2020
urgent.
than in any single quarter of the 2007-2009 recession,
although the magnitude of the difference is smaller when
Although this pattern has held in previous recessions,
population is accounted for. The majority of the drop in
expenditures on nondurable goods have experienced a
total PCE was due to a decline in spending on services, a
larger decline than spending on durable goods in the current
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Introduction to the U.S. Economy: Consumer Spending
COVID-19 recession. Figure 2 illustrates the percent
spending indirectly, through its effect on aggregate demand
change in expenditures on durable and nondurable goods
and the broader economy. How effective fiscal policy is at
from beginning to end of the 2007-2009 recession and thus
changing aggregate demand relies on how directly it affects
far in the current recession. The spending pattern during the
aggregate demand and the extent to which it stimulates
2007-2009 financial crisis followed the traditional pattern
consumer spending.
and showed a larger decrease in spending on durable than
nondurable goods. The current recession shows the
Marginal Propensity to Consume
opposite—the nature of the public health crisis halted
The marginal propensity to consume (MPC) is an economic
spending on many nondurable goods, such as gasoline for a
concept that measures how much of one additional unit of
car, more so than on durable goods, such as a refrigerator or
disposable income an individual will consume, or spend.
washing machine. Swift action by the Federal Reserve to
For example, if an individual were to receive one extra
lower interest rates and the economic impact payments that
dollar of disposable income, and spent 60 cents of that
went to a portion of the population may have helped bolster
dollar, that individual would have an MPC equal to 0.6.
spending on durable goods.
MPCs vary across individuals based on characteristics such
as income and preference. Even though a theoretical
Figure 2. Cyclicality of Spending on Goods
construct, MPCs can be a useful tool to policymakers as
they help determine how much a policy will affect
consumer spending, and, ultimately, GDP.
Theory states that changes to government spending will
have a larger impact on GDP than changes to taxes or
transfers. A change in government spending has a direct
one-to-one impact on GDP and a secondary effect on GDP
in the form of any consumer spending or private investment
it engenders. A change in taxes or transfers direct impact on
GDP will be less than one-to-one, by the factor of the MPC,
as individuals are not likely to put all of the money received
back into the economy. For example, a decrease in taxes
would result in an increase in personal income and an
increase in spending by some amount less than the increase
Source: CRS calculations based on BEA data.
in income, as some amount will be saved. As with
Consumer Spending and Monetary
government spending, changes in taxes or transfers will
Policy
have secondary effects on consumer spending and private
investment, and therefore, in any case the effect on GDP is
Interest rates can affect consumer decisions, largely in that
multiplicative.
they provide a trade-off between saving and spending.
Higher interest rates give consumers a greater incentive to
Targeting tax and transfer measures to individuals with
put money in, for example, a savings account to earn
higher MPCs could result in higher multipliers. For
interest. Lower interest rates reduce the cost of borrowing,
example, low-income individuals tend to have relatively
encouraging consumers to use credit to make big purchases,
high MPCs as they tend to get more utility from an extra
such as buying a car. Reducing short-term interest rates is
dollar of spending than a high-income individual would.
the first tool the Federal Reserve uses in an economic
This largely held true with the recent example of the
downturn in an attempt to stimulate interest-sensitive
economic impact payments—direct transfer payments made
spending, such as spending on consumer durables.
to individuals as part of the stimulus. An August working
Consumer Spending and Fiscal Policy
paper from the National Bureau of Economic Research,
How Did U.S. Consumers Use Their Stimulus Payments,
Fiscal policies that directly address aggregate demand or
found that lower-income individuals were much more likely
income are likely to at least indirectly affect consumer
to spend most or all of their payments as compared with
spending. Aggregate demand is the total demand for all
their higher-income counterparts.
finished goods and services in the economy. In the short-
term, when total aggregate demand falls, it creates
Although higher MPCs can make it easier to recover from a
recessionary conditions in an economy, often resulting in a
recession, very high MPCs do not necessarily engender
decrease in consumer spending as well.
long-run economic growth, as saving is a determinant of
long-run growth. What is not consumed is saved, and
Policy Tools
therefore relatively high rates of consumption lead to
Three main types of fiscal policy can be employed to
relatively low rates of saving. For a more in depth
increase aggregate demand during a recessionary period—
discussion of the relationship between long-run saving and
increases in government spending, decreases in taxes, and
growth, see CRS In Focus IF10963, Introduction to U.S.
increases in direct transfers. Taxes and transfers both
Economy: Personal Saving, by Marc Labonte.
directly affect personal disposable income, meaning that
they will also directly affect consumer spending, and
Lida R. Weinstock, Analyst in Macroeconomic Policy
through this change, will affect aggregate demand. In
contrast, government spending affects personal income and
IF11657
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Introduction to the U.S. Economy: Consumer Spending
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