Consumer Spending Increases 40.7% in Q3 2020

Consumer Spending Statistics and Current Trends

Two women shopping in the produce section of a grocery store
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Consumer spending, also known as personal consumption expenditures (PCE), increased 40.7% in the third quarter (Q3) of 2020, according to the third quarter gross domestic product advance estimate. This follows a significant drop in PCE for the second quarter (-33.2%) due to the economic repercussions of the COVID-19 pandemic. 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 Q3 showed that the economy increased by 33.1% as businesses reopened after being closed due to the COVID-19 pandemic. This follows a second quarter GDP decrease of 31.4%. 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 $14.3 trillion in the third quarter. On an annualized basis, that's a 40.7% increase from the second quarter, according to the BEA.

Spending on goods increased by 45.4%. That includes spending on durable goods, like automobiles, which increased dramatically—by 82.2%. Spending on nondurable goods, like groceries, increased by 28.8%. Spending on services, like hair salons, increased by 38.4%. Given how much consumer spending dropped during the second quarter of 2020 (PCE declined by 33.2%), it makes sense that as economic activities resume, there would be a significant increase in consumer spending. 

Key Takeaways

  • Consumer spending, also known as personal consumption expenditures (PCE), increased 40.7% in the third quarter of 2020, following a decrease of 33.2% in the second quarter of 2020.
  • Spending on durable goods increased by 82.2% during this time.
  • Spending increased as governments allowed businesses to reopen after closing due to the COVID-19 pandemic.

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 third 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. Third quarter online sales increased 37.1% over the same period in 2019.

For October 2020, advance estimates of seasonally adjusted retail sales showed almost no change from September, with a 0.3% increase. Sales were up 5.7% from October a year ago, and total sales from August through October were up 5.1% from the same period in 2019, which likely reflects increased spending after the closures in the second quarter of 2020.

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 Black Friday in 2019 grew by 19.6% over the previous year, according to Adobe data. It wouldn't be surprising to see that number tick up even more in 2020 with less in-person shopping taking place because of the pandemic.

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 October 2020, consumer confidence is the highest it's been since before the pandemic, but it's still 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.

Article Sources

  1. Bureau of Economic Analysis. "Gross Domestic Product, Third Quarter 2020 (Advance Estimate)," Page 8. Accessed Nov. 19, 2020.

  2. Bureau of Economic Analysis. "Gross Domestic Product, Third Quarter 2020 (Advance Estimate)," Page 1. Accessed Nov. 19, 2020.

  3. Bureau of Economic Analysis. “National Income and Product Accounts Tables," Table 1.1.5. Nominal GDP. Accessed Nov. 19, 2020.

  4. Bureau of Economic Analysis. “National Income and Product Accounts Tables," Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product. Accessed Nov. 19, 2020.

  5. U.S. Census Bureau. "Quarterly Retail E-Commerce Sales 3rd Quarter 2020." Accessed Nov. 19, 2020.

  6. U.S. Census Bureau. "Advance Monthly Sales for Retail and Food Services, October 2020," Page 1. Accessed Nov. 19, 2020.

  7. Adobe Blog. "Adobe Data Shows Record Cyber Monday With $9.2 Billion in Online Sales." Accessed Nov. 19, 2020.

  8. Consumer Financial Protection Bureau. "The Consumer Credit Card Market," Page 26. Accessed Nov. 19, 2020.

  9. Trading Economics. "United States Consumer Sentiment." Accessed Nov. 12, 2020.