Introduction to U.S. Economy: Consumer Spending
link to page 1 
Updated July 12, 2022
Introduction to U.S. Economy: Consumer Spending
Consumer spending is a key driver of short-run economic
notably to the increase. Growth in PCE has been positive,
growth in the U.S. economy. This In Focus provides an
and generally robust, since the third quarter of 2020.
overview of consumer spending, summarizes recent trends,
describes its relationship with the business cycle, and
Figure 1. Real Personal Consumption Expenditures
discusses policy that can impact and be affected by
Q1 2005-Q1 2022
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
largely of the purchases of new goods and services by
households, among others. BEA measures the values of
Source: Bureau of Economic Analysis (BEA).
expenditure transactions, including sales and excise taxes.
Note: Data are seasonally adjusted at annual rates. Gray bars
Measuring consumption expenditures against income
indicate recessions.
allows for a comparison of how much consumers spend
versus save. Tracking what people buy and how much they
spend allows BEA to also track fluctuations in price levels,
Of note, patterns of spending have changed in the wake of
referred to as inflation in the case of rising prices. One of
COVID-19. Spending shifted notably toward goods while
the most widely used sources for measuring inflation is
spending on services has lagged. The extent to which this
BEA’s PCE Price Index. Real PCE (PCE adjusted for
trend may last is unclear.
inflation) is calculated by adjusting PCE by the price index.
Consumer Spending and the Economy
Recent Trends in Consumer Spending
Patterns of consumer spending can be linked closely with
Figure 1 shows the pattern of real PCE in the United States
broader economic conditions, specifically the business
between the first quarter of 2005 and the first quarter of
cycle and economic growth.
2022. The total PCE data are additionally shown broken out
The Business Cycle and GDP
into spending in two main categories, goods and services.
Expenditures of both goods and services have increased
Consumer spending generally follows the pattern of the
steadily since 2005, except during the financial crisis and
business cycle. During economic downturns, consumer
recession of 2007-2009 and the COVID-19 recession.
spending typically decreases as unemployment increases
and personal income decreases. In contrast, during
In 2020, PCE dropped by a non-annualized 6.6% in March
expansions, consumer spending increases as unemployment
and 12.6% in April before increasing by 8.5% and 5.9% in
decreases and personal income increases. A strong
May and June—notably large monthly changes. Even with
economy can impact consumer sentiment and spending.
the large drop during the COVID-19 recession, real PCE
Consumer confidence due to economic conditions may
remained higher in the second quarter of 2020 than in any
increase purchases of durable goods (goods that can be used
single quarter of the 2007-2009 recession, although the
over a long period of time), such as vehicles or major
magnitude of the difference is smaller when population is
appliances.
accounted for. The majority of the drop in total PCE was
due to a decline in spending on services, a result of business
Historically, spending on durable goods (long-lasting
closures, social distancing, and other measures taken to
goods, such as cars and home appliances) has been more
limit the spread of the virus. The increase in the third
cyclical than spending on nondurable goods (goods that are
“single use” or are consumed over a short period of time
quarter of 2020 was led by an increase in services
,
expenditures, although spending on goods also contributed
such as food and fuel). Therefore, spending on durable
goods should decrease relatively more in a recession as, in
https://crsreports.congress.gov
link to page 2
Introduction to U.S. Economy: Consumer Spending
theory, individuals have the ability to put off these usually
they will also affect consumer spending, and through this
larger purchases until the economy improves or the need
change, will affect aggregate demand. In contrast,
becomes sufficiently urgent.
government spending affects personal income and spending
more indirectly, through its effect on aggregate demand and
Although this pattern has held in previous recessions,
the broader economy. How effective fiscal policy is at
expenditures on nondurable goods have experienced a
changing aggregate demand relies on how directly it affects
larger decline than spending on durable goods in the
aggregate demand and the extent to which it stimulates
COVID-19 recession. Figure 2 illustrates the percent
consumer spending.
change in expenditures on durable and nondurable goods
from beginning to end of the 2007-2009 recession and
Marginal Propensity to Consume
COVID-19 recession. The spending pattern during the
The marginal propensity to consume (MPC) is an economic
2007-2009 financial crisis followed the traditional pattern
concept that measures how much of one additional unit of
and showed a larger decrease in spending on durable than
disposable income an individual will consume, or spend.
nondurable goods. The COVID-19 recession shows the
For example, if an individual were to receive one extra
opposite—the nature of the public health crisis halted
dollar of disposable income, and spent 60 cents of that
spending on many nondurable goods, such as gasoline for a
dollar, that individual would have an MPC equal to 0.6.
car and meals out, more so than on durable goods, such as a
MPCs vary across individuals based on characteristics such
refrigerator or washing machine.
as income and preference. Even though a theoretical
construct, MPCs can be a useful tool to policymakers as
Figure 2. Cyclicality of Spending on Goods
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
in income, as some amount will be saved. As with
Source: CRS calculations based on BEA data.
government spending, changes in taxes or transfers will
Consumer Spending and Monetary
have secondary effects on consumer spending and private
Policy
investment, and therefore, in any case the effect on GDP is
multiplicative.
Interest rates can affect consumer decisions, largely in that
they provide a trade-off between saving and spending.
Targeting tax and transfer measures to individuals with
Higher interest rates give consumers a greater incentive to
higher MPCs could result in higher multipliers. For
put money in, for example, a savings account to earn
example, low-income individuals tend to have relatively
interest. Lower interest rates reduce the cost of borrowing,
high MPCs as they tend to get more utility from an extra
encouraging consumers to use credit to make big purchases,
dollar of spending than a high-income individual would.
such as buying a car. Reducing short-term interest rates is
Research on how households spend direct transfer
the first tool the Federal Reserve uses in an economic
payments largely corroborates this view—lower-income
downturn in an attempt to stimulate interest-sensitive
individuals are more likely to spend most or all of transfer
spending, such as spending on consumer durables.
payments as compared with their higher-income
Consumer Spending and Fiscal Policy
counterparts.
Fiscal policies that directly address aggregate demand or
Although higher MPCs can make it easier to recover from a
income are likely to at least indirectly affect consumer
recession, very high MPCs do not necessarily engender
spending. Aggregate demand is the total demand for all
long-run economic growth, as saving is a determinant of
finished goods and services in the economy. In the short-
long-run growth. What is not consumed is saved, and
term, when total aggregate demand falls, it creates
therefore relatively high rates of consumption lead to
recessionary conditions in an economy, often resulting in a
relatively low rates of saving. For a more in depth
decrease in consumer spending as well.
discussion of the relationship between long-run saving and
growth, see CRS In Focus IF10963, Introduction to U.S.
Policy Tools
Economy: Personal Saving, by Lida R. Weinstock.
Three main types of fiscal policy can be employed to
increase aggregate demand during a recessionary period—
Lida R. Weinstock, Analyst Macroeconomic Policy
increases in government spending, decreases in taxes, and
increases in direct transfers. Taxes and transfers both
IF11657
directly affect personal disposable income, meaning that
https://crsreports.congress.gov
Introduction to U.S. Economy: Consumer Spending
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11657 · VERSION 3 · UPDATED
Updated July 12, 2022
Introduction to U.S. Economy: Consumer Spending
Consumer spending is a key driver of short-run economic
notably to the increase. Growth in PCE has been positive,
growth in the U.S. economy. This In Focus provides an
and generally robust, since the third quarter of 2020.
overview of consumer spending, summarizes recent trends,
describes its relationship with the business cycle, and
Figure 1. Real Personal Consumption Expenditures
discusses policy that can impact and be affected by
Q1 2005-Q1 2022
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
largely of the purchases of new goods and services by
households, among others. BEA measures the values of
Source: Bureau of Economic Analysis (BEA).
expenditure transactions, including sales and excise taxes.
Note: Data are seasonally adjusted at annual rates. Gray bars
Measuring consumption expenditures against income
indicate recessions.
allows for a comparison of how much consumers spend
versus save. Tracking what people buy and how much they
spend allows BEA to also track fluctuations in price levels,
Of note, patterns of spending have changed in the wake of
referred to as inflation in the case of rising prices. One of
COVID-19. Spending shifted notably toward goods while
the most widely used sources for measuring inflation is
spending on services has lagged. The extent to which this
BEA’s PCE Price Index. Real PCE (PCE adjusted for
trend may last is unclear.
inflation) is calculated by adjusting PCE by the price index.
Consumer Spending and the Economy
Recent Trends in Consumer Spending
Patterns of consumer spending can be linked closely with
Figure 1 shows the pattern of real PCE in the United States
broader economic conditions, specifically the business
between the first quarter of 2005 and the first quarter of
cycle and economic growth.
2022. The total PCE data are additionally shown broken out
The Business Cycle and GDP
into spending in two main categories, goods and services.
Expenditures of both goods and services have increased
Consumer spending generally follows the pattern of the
steadily since 2005, except during the financial crisis and
business cycle. During economic downturns, consumer
recession of 2007-2009 and the COVID-19 recession.
spending typically decreases as unemployment increases
and personal income decreases. In contrast, during
In 2020, PCE dropped by a non-annualized 6.6% in March
expansions, consumer spending increases as unemployment
and 12.6% in April before increasing by 8.5% and 5.9% in
decreases and personal income increases. A strong
May and June—notably large monthly changes. Even with
economy can impact consumer sentiment and spending.
the large drop during the COVID-19 recession, real PCE
Consumer confidence due to economic conditions may
remained higher in the second quarter of 2020 than in any
increase purchases of durable goods (goods that can be used
single quarter of the 2007-2009 recession, although the
over a long period of time), such as vehicles or major
magnitude of the difference is smaller when population is
appliances.
accounted for. The majority of the drop in total PCE was
due to a decline in spending on services, a result of business
Historically, spending on durable goods (long-lasting
closures, social distancing, and other measures taken to
goods, such as cars and home appliances) has been more
limit the spread of the virus. The increase in the third
cyclical than spending on nondurable goods (goods that are
“single use” or are consumed over a short period of time
quarter of 2020 was led by an increase in services
,
expenditures, although spending on goods also contributed
such as food and fuel). Therefore, spending on durable
goods should decrease relatively more in a recession as, in
https://crsreports.congress.gov
link to page 2
Introduction to U.S. Economy: Consumer Spending
theory, individuals have the ability to put off these usually
they will also affect consumer spending, and through this
larger purchases until the economy improves or the need
change, will affect aggregate demand. In contrast,
becomes sufficiently urgent.
government spending affects personal income and spending
more indirectly, through its effect on aggregate demand and
Although this pattern has held in previous recessions,
the broader economy. How effective fiscal policy is at
expenditures on nondurable goods have experienced a
changing aggregate demand relies on how directly it affects
larger decline than spending on durable goods in the
aggregate demand and the extent to which it stimulates
COVID-19 recession. Figure 2 illustrates the percent
consumer spending.
change in expenditures on durable and nondurable goods
from beginning to end of the 2007-2009 recession and
Marginal Propensity to Consume
COVID-19 recession. The spending pattern during the
The marginal propensity to consume (MPC) is an economic
2007-2009 financial crisis followed the traditional pattern
concept that measures how much of one additional unit of
and showed a larger decrease in spending on durable than
disposable income an individual will consume, or spend.
nondurable goods. The COVID-19 recession shows the
For example, if an individual were to receive one extra
opposite—the nature of the public health crisis halted
dollar of disposable income, and spent 60 cents of that
spending on many nondurable goods, such as gasoline for a
dollar, that individual would have an MPC equal to 0.6.
car and meals out, more so than on durable goods, such as a
MPCs vary across individuals based on characteristics such
refrigerator or washing machine.
as income and preference. Even though a theoretical
construct, MPCs can be a useful tool to policymakers as
Figure 2. Cyclicality of Spending on Goods
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
in income, as some amount will be saved. As with
Source: CRS calculations based on BEA data.
government spending, changes in taxes or transfers will
Consumer Spending and Monetary
have secondary effects on consumer spending and private
Policy
investment, and therefore, in any case the effect on GDP is
multiplicative.
Interest rates can affect consumer decisions, largely in that
they provide a trade-off between saving and spending.
Targeting tax and transfer measures to individuals with
Higher interest rates give consumers a greater incentive to
higher MPCs could result in higher multipliers. For
put money in, for example, a savings account to earn
example, low-income individuals tend to have relatively
interest. Lower interest rates reduce the cost of borrowing,
high MPCs as they tend to get more utility from an extra
encouraging consumers to use credit to make big purchases,
dollar of spending than a high-income individual would.
such as buying a car. Reducing short-term interest rates is
Research on how households spend direct transfer
the first tool the Federal Reserve uses in an economic
payments largely corroborates this view—lower-income
downturn in an attempt to stimulate interest-sensitive
individuals are more likely to spend most or all of transfer
spending, such as spending on consumer durables.
payments as compared with their higher-income
Consumer Spending and Fiscal Policy
counterparts.
Fiscal policies that directly address aggregate demand or
Although higher MPCs can make it easier to recover from a
income are likely to at least indirectly affect consumer
recession, very high MPCs do not necessarily engender
spending. Aggregate demand is the total demand for all
long-run economic growth, as saving is a determinant of
finished goods and services in the economy. In the short-
long-run growth. What is not consumed is saved, and
term, when total aggregate demand falls, it creates
therefore relatively high rates of consumption lead to
recessionary conditions in an economy, often resulting in a
relatively low rates of saving. For a more in depth
decrease in consumer spending as well.
discussion of the relationship between long-run saving and
growth, see CRS In Focus IF10963, Introduction to U.S.
Policy Tools
Economy: Personal Saving, by Lida R. Weinstock.
Three main types of fiscal policy can be employed to
increase aggregate demand during a recessionary period—
Lida R. Weinstock, Analyst Macroeconomic Policy
increases in government spending, decreases in taxes, and
increases in direct transfers. Taxes and transfers both
IF11657
directly affect personal disposable income, meaning that
https://crsreports.congress.gov
Introduction to U.S. Economy: Consumer Spending
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11657 · VERSION 3 · UPDATED