Consumer spending accounts for 70% of economic activity. That’s one little factoid that we’ve repeated on Marketplace over and over and over. But given how much consumers are modifying their behavior now, will that still be true in the future?
First, let’s dig into what that 70% refers to.
Gross domestic product, or GDP, is an attempt to calculate the total value of goods and services produced by an economy. By the most recent measure, U.S. GDP was estimated to be $21.73 trillion.
The Bureau of Economic Analysis calculates GDP using four major components: private investment, government purchases of goods and services, net exports and personal consumption expenditures— that’s the big one. Personal consumption expenditures include all the goods and services that American consumers buy and pay for, including housing and healthcare, and accounts for 70% of the whole.
But personal consumption expenditures, or consumer spending, has not always accounted for as much of GDP as it does now. “Back in the 1970s, it was around 60% of GDP compared to around 70% today,” said Shannon Seery, an economic analyst with Wells Fargo Securities. Over the past couple decades, consumer spending has grown faster than other parts of the economy and changed the composition of GDP.
“Consumer spending is punching above its weight, if you will,” said William R. Emmons, the lead economist at the St. Louis Federal Reserve Bank’s Center for Household Financial Stability. Even as global growth slowed, business investment waned, and CEO confidence softened last year, consumers kept spending. “So that’s kind of what people mean when they say that the consumer is driving the economy,” Seery said.
So, what happens now? Now that none of us are going on vacation, or to the movies, or out to dinner, there are 10 million and counting newly unemployed people, and large parts of this economy are shutting down?
“The level of consumer spending is very likely to go down, but remember, these other things are going to be changing too,” Emmons said.
When people spend less on goods and services, businesses invest less too. They build fewer factories, hire fewer employees. In a slowing economy, less money is earned so less money is paid in taxes, which means some government spending could go down too. “There are some reports that because state and local governments are facing revenue shortfalls themselves, you could even see some decline in the government purchases area,” Emmons said.
The point is, it’s all connected. As consumer spending contracts, other parts of the economy will contract with it. “So in terms of relative contributions of consumers, it’s entirely plausible that consumer spending will be at least as important if not more important, as we go into the downturn,” Emmons said.
COVID-19 Economy FAQs
What do I need to know about tax season this year?
Glad you asked! We have a whole separate FAQ section on that. Some quick hits: The deadline has been extended from April 15 to May 17 for individuals. Also, millions of people received unemployment benefits in 2020 — up to $10,200 of which will now be tax-free for those with an adjusted gross income of less than $150,000. And, for those who filed before the American Rescue Plan passed, simply put, you do not need to file an amended return at the moment. Find answers to the rest of your questions here.
How long will it be until the economy is back to normal?
It feels like things are getting better, more and more people getting vaccinated, more businesses opening, but we’re not entirely out of the woods. To illustrate: two recent pieces of news from the Centers for Disease Control. Item 1: The CDC is extending its tenant eviction moratorium to June 30. Item 2: The cruise industry didn’t get what it wanted — restrictions on sailing from U.S. ports will stay in place until November. Very different issues with different stakes, but both point to the fact that the CDC thinks we still have a ways to go before the pandemic is over, according to Dr. Philip Landrigan, who used to work at the CDC and now teaches at Boston College.
How are those COVID relief payments affecting consumers?
Payments started going out within days of President Joe Biden signing the American Rescue Plan, and that’s been a big shot in the arm for consumers, said John Leer at Morning Consult, which polls Americans every day. “Consumer confidence is really on a tear. They are growing more confident at a faster rate than they have following the prior two stimulus packages.” Leer said this time around the checks are bigger and they’re getting out faster. Now, rising confidence is likely to spark more consumer spending. But Lisa Rowan at Forbes Advisor said it’s not clear how much or how fast.
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