Consumer Spending Increases 2.4% in Q4 2020

Consumer Spending Statistics and Current Trends

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Consumer spending, also known as personal consumption expenditures (PCE), increased 2.4% in the fourth quarter (Q4) of 2020, according to the fourth-quarter gross domestic product second estimate. This follows a significant increase in PCE for the third quarter (41.0%). PCE refers to the value of the goods and services bought for or by residents of the United States.

The Bureau of Economic Analysis (BEA) reports consumer spending at an annualized rate in order to compare it with gross domestic product (GDP). GDP for Q4 showed that the economy increased by 4.1%. This follows a third-quarter GDP increase of 33.4% as businesses reopened after being closed due to the COVID-19 pandemic. Consumer spending statistics help provide a picture of the financial health of the economy at large, so businesses that monitor them can better predict consumer behavior.

PCE was $14.5 trillion in the fourth quarter. On an annualized basis, that's a 2.4% increase from the third quarter, according to the BEA.

Spending on goods decreased by -0.9%. That includes spending on durable goods, like automobiles, which fell 0.6% from Q3. Spending on nondurable goods, like groceries, decreased by 1.1%. Spending on services, like hair salons, increased by 4.0%.

Key Takeaways

  • Consumer spending, also known as personal consumption expenditures (PCE), increased 2.4% in the fourth quarter of 2020, following an increase of 41.0% in the third quarter of 2020.
  • Spending on durable goods decreased by 0.6% during this time.
  • Spending increased in the third quarter as governments allowed businesses to reopen after closing due to the COVID-19 pandemic, but slowed in the fourth quarter as businesses once again had to close.

History of Consumer Spending

Strong consumer spending is the main reason the GDP growth rate had been within a healthy range of 2% to 3% since the Great Recession. As the table below shows, consumer spending has remained close to that healthy range since 2010, following the financial crisis.

Retail Sales Increase as Businesses Reopen

U.S. retail sales in the fourth quarter increased 6.9% from the same quarter in 2019, according to Census Bureau data. That annualized rate is well above the 3% rate of growth for annual retail sales growth that's viewed as desirable. Stores that closed or limited hours in the second quarter reopened, and consumers started to venture out again. Even as brick-and-mortar stores reopened, many shoppers continued to buy goods online. Fourth quarter online sales increased 32.1% over the same period in 2019.

For January 2021, advance estimates of seasonally adjusted retail sales showed a 5.3% increase from December. Sales were up 7.4% from January a year ago, and total sales from November through January were up 4.6% from the same period a year ago, which likely reflects a continued increase in spending after the closures in the second quarter of 2020 along with holiday shopping,

The shift to online shopping during the 2020 pandemic accentuated a long-term trend that has been ongoing for almost a year now. For example, online sales for Cyber Monday in 2020 grew by 15.1% over the previous year, according to Adobe data, making it the largest online shopping day in U.S. history.

Consumer spending continues to shift toward online shopping versus shopping in brick-and-mortar stores. This will increase dramatically as a result of the coronavirus pandemic.

How Retailers Have Responded to Changing Consumer Expectations

Retailers now have to contend with shoppers who expect high value combined with low prices. As a result, Amazon and other online stores have stolen business from brick-and-mortar stores. Companies that depend exclusively on a low-cost or a high-value competitive advantage have fallen behind. Instead, the retailers today must provide both.

Those companies that don't strike the right balance between value and price could lose their customers permanently. 

Factors That Affect Consumer Spending

For business owners looking for ways to appeal to consumers, three trends should factor into their planning.

Consumer Debt

Spending took a long time to bounce back from the recession. First and foremost, millions of people went back to school to find new careers. That cut back on shopping. But don't blame credit card debt alone, which surpassed pre-recession levels in 2017. Home and student loan debt are also major contributors to overall consumer debt. Increases in consumer debt can curb future spending.

Stagnant Wages

Average income levels have not kept pace with growth in either the stock market or GDP. That's partly because jobs have been outsourced to cheaper labor in China, India, and low-wage manufacturing in Asia. Despite changes to the North American Free Trade Agreement and other free trade agreements, some manufacturers may still choose to cut jobs locally and hire abroad. Employees who lose jobs may have cut back on spending and increased saving to make up for income shortfalls.

Consumer Confidence

Many analysts look to the Consumer Confidence Index, a measure of how Americans feel about the economy, to predict how likely it is consumers will spend. People are more likely to shop when they feel confident about their ability to get a more lucrative job. Until the 2020 recession, numbers were inching higher. As of January 2021, consumer confidence is down from December and far below pre-pandemic levels.

Why Consumer Spending Matters

Because consumer spending is such a large component of GDP, it is a leading economic indicator. If spending is flat, economic growth may also be anemic, which can increase recession fears. Beyond forecasting the economy, consumer spending statistics also help retailers evolve in a way that appeals to consumers so that they can remain in business.