Consumer Spending’s Impact on the Economy

Consumer spending drives the overall direction of the economy

by Kristen Stephenson

Last year, GPEC launched the Economic Monitor, a comprehensive web tool designed to provide timely, actionable insights into the state of the economy. Through an exploration of key economic indicators, the Economic Monitor offers a concise picture of health at both national and regional levels.

Each month, I’m diving into one of the indicators from the Monitor to share in greater detail what the metric measures are, why it matters to the economy and what the current numbers tell us. This month we’re going to look at consumer spending and what this indicator can tell us about the economy.

What does consumer spending measure?

Consumer spending is the value of goods and services purchased by, or on behalf of, individuals. This includes both durable goods (those with a lifespan of more than three years such as furniture or cars) and nondurable goods (food and medicines, for instance).  

Consumer spending is sometimes referred to as personal consumption expenditures (PCE). For example, the Bureau of Economic Analysis (BEA) reports on the PCE Index, which measures prices paid and indicates potential inflation or deflation, and tracks PCE as a portion of gross domestic product. 

Why does consumer spending matter?

Consumer spending, consumer sentiment and gross domestic product (GDP) are intrinsically linked. Consumer spending is a significant driver of the economy and is the largest component of quarterly GDP – personal consumption expenditures comprised nearly 70% of GDP in Q1 2024. Because of this, the direction of consumer spending (whether increasing or decreasing) drives the direction of the overall economy. If consumers are feeling concerned about the economy, they may pull back on spending which can in turn lower GDP. Conversely, if consumers are spending, GDP will generally rise. Employment is also correlated as many jobs in the U.S. are related to consumer spending either directly or indirectly through the manufacturing, distribution or sales of consumer goods and services.  

What do the current numbers say?

Annual data released by the BEA shows that real personal consumption expenditures in Arizona reached $318.2 B in 2022 compared to $317.5 B in 2021, accounting for a 0.2% increase. Real personal consumption expenditures factor in the PCE price index to give us a value that is adjusted for inflation. Longer term trends show more significant growth. Since 2017, consumer spending in Arizona has grown by 20% compared to 13% for the U.S., even when factoring in a small decline in 2020.  

In the U.S., real personal consumption expenditures reached $15.1 T, up from $14.7 T in 2021 for an increase of 2.5% year over year. The BEA also releases data for the U.S. on a monthly and quarterly basis. As of March 2024, real personal consumption expenditures are $15.7 T, an increase of 0.5% compared to February. Consumer spending has increased the past two months after declining from December 2023 to January 2024. Services make up about two-thirds of consumer spending, while goods make up the remainder.  

To monitor consumer spending in real time along with me, mapped alongside 13 other key indicators of health, visit gpec.org/monitor. We hope you find the Monitor a valuable tool in understanding the ever-changing economic landscape. 

See Economic Monitor