Consumer Spending

ECO 2301
Principles of Macroeconomics
Anthony Le

November 30th, 2011

Consumer Spending Consumer spending is defined as “the goods and services bought by the households in the satisfaction of their wants and needs.” (BusinessDictionary.com). It is also known as personal consumption expenditure and is the largest part of aggregate demand or effective demand at the macroeconomic level. Why is consumer spending important in the U.S. economy? In fact, consumer spending is the single biggest determinant of the U.S. economy’s health, accounting for about two-thirds of the United States’ annual Gross Domestic Product (GDP). A decline in consumer spending could spoil the U.S. economy or certain market sectors. By
Until then, Federal Chairman Ben S. Bernanke said in his semi-annual testimony to Congress on July 13 that “There is also ongoing uncertainty about the durability of the recovery”.
Knowing the factors that could affect consumer spending, the next question that one can ask is whether consumer spending could drive a recovery in the economy. The first question we need to ask ourselves is what really is considered ‘spending’? Are households paying down debt and rebuilding their nest eggs considered ‘spending’? Not quite exactly! But, that still can boost up the economic improvement in some ways. Consumers nowadays are still struggling with debts. Due to cheap financing, lax lending standards, and a surge in wealth from home values and stock prices, consumers are still carrying the debts that have been taken on over the past decades. With the subsequent reversal of fortune and wealth losses, households are forced to divert more income away from spending and toward savings and paying down their debt. As a result, their efforts to pay off some of the debts and rebuild savings limit the recovery’s strength. So far in this decade, households’ debt-to-income ratio has risen twice as fast as it did in the 1990s. Although the optimal level is yet still unknown, but if the ratio had grown along the slower trend of the 1990s, it would be about 110 percent