Mercedes Mullins
Consumer spending is often touted as the engine that drives economic growth, with consumption making up 70% of GDP. However, this view is contested, with some arguing that real savings and investment are the true drivers of economic growth. In 2025, consumer spending continued to fuel US economic growth, with personal consumption expenditures accounting for more than two-thirds of the nation's Gross Domestic Product. While consumer spending can indicate economic health, it is important to note that consumer demand does not always translate into increased employment. Income is a leading indicator of spending patterns, with higher-income quintiles spending more on average. Inflation and labour market trends also play a role in shaping consumer spending behaviour.
| Characteristics | Values |
|---|---|
| Consumer spending as a percentage of GDP | 70% |
| Consumer spending as a driver of economic growth | Steady consumer spending continues to fuel U.S. economic growth. |
| Consumer spending trends in 2025 | Retail sales slowed in April 2025, with a monthly increase of only 0.1%. However, retail sales from February to April were 5% higher than in 2024. |
| Consumer resilience | Consumer resilience helps keep the economy on track. In 2025's first quarter, Personal Consumption Expenditures accounted for more than two-thirds of the nation's Gross Domestic Product. |
| Consumer spending and employment | Consumer demand does not necessarily lead to increased employment. Businesses, not consumers, employ people. |
| True drivers of economic growth | Real savings and investment, which enable increased productivity, greater specialization, and trade. |
| Consumer spending and inflation | Average income continued to increase in the face of inflationary pressure. |
| Consumer spending and income | Historically, income is a leading indicator of spending patterns. Those in higher-income quintiles spend more on most goods and services. |
| Average annual consumer expenditures in 2023 | $77,280 |
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What You'll Learn
Consumer spending and economic growth
Consumer spending is a popular way to gauge the economy's strength. In 2023, average annual expenditures for all consumer units in the US increased by 5.9% from 2022, reaching $77,280. This increase in consumer spending can be attributed to rising prices, with a 4.1% increase from 2022 to 2023, as measured by the Consumer Price Index for All Urban Consumers (CPI-U). Income is a leading indicator of spending patterns, with higher-income quintiles spending more on most goods and services.
However, the impact of consumer spending on economic growth is nuanced. While consumer spending can fuel economic growth, it is not the sole or primary driver. As John Stuart Mill noted, consumer demand does not directly translate into increased employment, as it is businesses that employ people. Uncertainty, such as that caused by the trade war between the US and China, can depress job growth despite robust consumption.
Additionally, savings and investment, which enable increased productivity, specialisation, and trade, are argued to be the true engines of economic growth. Consumption increases as a result of this growth rather than causing it. This is supported by the observation that an economy with high inequality can stagnate due to a lower "marginal propensity to consume" among the wealthy, who tend to save a larger share of their income.
In the context of the US economy, consumer spending has played a significant role in economic growth. In the first quarter of 2025, Personal Consumption Expenditures accounted for more than two-thirds of the nation's Gross Domestic Product (GDP). However, it is important to note that consumer sentiment does not always strongly correlate with economic growth. For example, in 2025, consumer sentiment reflected fears about rising prices, but the economy experienced a period of solid expansion.
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Consumer resilience and economic stability
Consumer spending is often hailed as the lifeblood of the economy, with spending on goods and services touted as the "engine" driving economic growth. Consumption makes up a significant proportion of a country's Gross Domestic Product (GDP), with some estimates placing it at 70%.
However, this view has been challenged, with some arguing that consumption is not the cause of economic growth but rather a result of it. They posit that savings and investments, which enable increased productivity, greater specialisation, and trade, are the true drivers of a robust economy.
Consumer resilience, or the ability of consumers to maintain or increase their spending, plays a crucial role in economic stability. When consumers are confident about their financial prospects, they are more likely to spend, which can fuel economic growth. Conversely, when consumers are uncertain or concerned about factors such as rising prices or inflation, their spending sentiment may decline, potentially slowing economic growth.
In recent years, consumers have faced challenges such as the COVID-19 pandemic, high inflation, and rising prices, which have impacted their spending habits and purchasing power. Despite these challenges, income gains have helped stabilise debt burdens, and consumers have continued to spend, contributing to economic expansion.
Consumer spending data is closely monitored by markets and policymakers as a key indicator of economic health. While consumer sentiment is important, it may not always accurately predict actual economic growth. For instance, while consumer sentiment may reflect fears about rising prices, the economy may still experience solid expansion.
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Consumer demand and employment
Consumer spending is a key driver of economic growth. In 2025, personal consumption expenditures accounted for more than two-thirds of the nation's Gross Domestic Product (GDP). However, it's important to note that consumer demand does not always translate into increased employment. Businesses are the ones that employ people, and they make hiring decisions based on their expectations about the future.
Consumer spending patterns are influenced by various factors, including income, inflation, and economic conditions. In 2023, consumers faced high inflation rates, which affected their purchasing power. However, average incomes continued to increase, and gains in nominal income were observed across all income quintiles. This indicates that consumers were able to somewhat keep pace with rising prices.
The composition of consumer expenditures also varies across different categories. In 2023, consumers spent larger shares on transportation, food, personal insurance, pensions, education, and miscellaneous expenditures. At the same time, expenditure shares on housing, apparel, utilities, and tobacco products declined.
While consumer spending can fuel economic growth, it is not the sole determinant. Savings and investment, which enable increased productivity, specialization, and trade, are also crucial for economic growth. A healthy economy requires a balance between consumption, savings, and investment. Additionally, factors such as labor market trends and consumer sentiment can influence the impact of consumer spending on employment and the overall economy.
In summary, consumer demand and spending play a significant role in economic growth and can indirectly impact employment. However, other factors, such as business expectations, savings, investment, and economic conditions, also come into play. A thriving economy requires a combination of these elements working together to drive growth and create jobs.
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Savings, investment, and economic growth
While consumer spending is often touted as the "'engine' of economic growth, this is not necessarily the case. Consumption is indeed a critical component of a nation's gross domestic product (GDP), and consumer resilience helps keep the economy on track. However, it is essential to understand that consumer demand does not always translate into increased employment and economic growth.
The true drivers of economic growth lie in savings and investment, which enable increased productivity, greater specialization, and trade. Savings provide the funds for investment in capital goods, such as machinery, infrastructure, and technology. This, in turn, leads to higher productivity and economic growth. Additionally, a healthy savings rate can help a country withstand economic shocks, such as downturns, financial crises, and unexpected expenditures, without resorting to excessive borrowing.
The relationship between savings and economic growth has been observed in countries like Kosovo, where higher savings rates have positively impacted economic growth. This is particularly evident in developing countries, where financial capital for investment often comes from savings deposited in commercial banks. Conversely, low saving rates can lead to deficits and hinder a country's ability to invest in critical areas like education, infrastructure, and healthcare, adversely affecting future economic prospects.
In summary, while consumer spending is essential for economic growth, it is the savings and investment that fuel the expansion. Encouraging savings and promoting investment in productive practices are crucial for sustainable economic growth.
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Income and spending patterns
However, it is important to note that consumer spending patterns can be influenced by various economic conditions, such as inflation and the impact of the COVID-19 pandemic. In 2023, prices rose by an average of 4.1% from the previous year, affecting the purchasing power of consumers. Despite this, average income continued to increase, demonstrating the resilience of consumers in driving economic growth.
Consumer sentiment also plays a role in spending patterns. In 2025, consumer sentiment reached its second-lowest level in history, potentially due to fears about rising prices and uncertainty over trade wars. This indicates that consumers may be cautious about spending, which could impact economic growth. However, it is worth noting that the relationship between consumer sentiment and actual economic growth may not always be strong, as indicated by Beth Ann Bovino, chief economist at U.S. Bank.
While consumer spending is crucial, some economists argue that consumption is not the sole driver of economic growth. They suggest that real savings and investment, which enable increased productivity, greater specialization, and trade, are the true engines of economic growth. Increasing consumption is a result of that growth rather than the cause. Additionally, factors such as labor market trends and unemployment rates can also influence economic growth.
In conclusion, income and spending patterns are complex and influenced by various economic factors. While consumer spending is a key indicator and driver of economic growth, it is not the only factor at play. The interplay between consumption, income, savings, investment, and other economic indicators shapes the overall economic landscape.
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Frequently asked questions
Consumer spending is a key driver of economic growth. In the first quarter of 2025, consumer spending made up more than two-thirds of the nation's Gross Domestic Product (GDP).
Consumer confidence and sentiment can impact the economy. For example, if consumers are confident about the future, they may spend more, which boosts the economy. However, if confidence is low, consumers may spend less, which can slow economic growth.
Consumer spending is influenced by a variety of factors, including income, inflation, and interest rates. Typically, those with higher incomes spend more, and rising prices and interest rates may cause consumers to spend less.
Consumer demand does not always lead to increased employment. Businesses employ people, and they may be reluctant to hire new staff due to the financial risk, regardless of demand.
