The Importance of Consumer Spending

A national economy is a broad amalgamation of individual, business and government spending or investment. Governments typically pay close attention to economic factors to measure the strength of an economy. Consumers represent a major factor in economies. According to Henry Hazlitt, author of “Economics in One Lesson,” U.S. consumers account for approximately 70 percent of the national economy. Spending is an important role of consumers. Free market economies rely on consumer demand to gauge the allocation and distribution of economic resources.

Facts

Consumer spending is an important economic factor because it usually coincides with the overall consumer confidence in a nation’s economy. High consumer confidence indicators usually relate to higher levels of consumer spending in the economic market. Consumer confidence provides governments and businesses with an analysis on consumer perception. In the United States, The Conference Board measures consumer confidence by conducting a survey of 5,000 households. Consumers respond to a few questions from which The Conference Board calculates consumer confidence.

Types

Several types of consumer spending are found in the economic market. Necessities, non-durable goods, durable goods and luxury items are types of consumer spending. Necessities represent the food, shelter and clothing individuals need to maintain a certain quality of life. Non-durable goods last less than three years; these include gasoline, paper products and office supplies. Cars and houses are examples of durable goods, which last more than three years. Luxury items include jewelry, high-priced cars and other items not necessary for living a standard lifestyle.

Function

Significant changes to consumer spending in durable and luxury goods can be an important economic indicator. Consumer spending increases in these two categories usually represent individuals with higher income. Conversely, spending decreases may indicate lower individual income or consumer confidence. These spending categories can help businesses and governments determine if consumer spending is expanding or contracting based on the number of purchases.

Benefits

Businesses use consumer spending data in their supply and demand economic calculations. Supply and demand helps businesses produce goods or services at the most favorable consumer price points. Businesses who can achieve the equilibrium price will sell the maximum amount of goods with the highest available profit margin. Consumer spending helps companies determine which products have the most value in the economic marketplace. Businesses can also use information to find unmet consumer needs and develop new products.

Considerations

Consumer spending is the result of many factors, including monetary or fiscal policy, inflation, purchasing power and supply of goods. Businesses and governments should review economic indicators relating to these other items when gauging the overall health of the economy. While consumer spending plays an important role in the economy, these other factors can also provide information for businesses creating corporate or business strategies.