Consumer spending, also known as personal consumption expenditures (PCE), increased 2.5% in the fourth quarter (Q4) 2021, an increase from the third quarter's 2.0% increase, but far behind Q1 and Q2's much more substantial increases of 11.4% and 12%, respectively. 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 to compare it with gross domestic product (GDP). GDP for Q4 2021 showed that productivity increased by 6.9%. This follows a first-quarter GDP increase of 6.3%, a second-quarter increase of 6.7%, and a third-quarter increase of 2.3%. In 2021, full-year growth stood at 5.7%, the largest annual increase since 1984. 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 $16.34 trillion in the fourth quarter of 2021.
Spending on goods increased by 1.1%. That includes spending on durable goods like automobiles, which increased 2.5% from Q3. Spending on nondurable goods, like groceries, decreased by 0.4%. Spending on services, like hair salons, increased by 3.3%.
- Consumer spending, also known as personal consumption expenditures (PCE), increased only 3.3% in the fourth quarter of 2021, up from an increase of 2.0% in the third quarter of 2021 but far behind Q2's increase of 12%.
- Spending on durable goods increased by 1.6% in Q4 2021.
- Spending increased slightly in the fourth quarter.
History of Consumer Spending
Strong consumer spending is the main reason the GDP growth rate has been within a healthy range of 2% to 3% since the Great Recession (not counting the pandemic-induced short recession in 2020). As the table below shows, consumer spending has remained close to that healthy range since 2010, following the financial crisis.
Retail Sales Increase as the Economy Grows
According to Census Bureau data, U.S. e-commerce sales in the fourth quarter of 2021 increased 9.4% from the same quarter in 2020. That annualized rate is above the 3% growth rate that's viewed as desirable. Third-quarter e-commerce increased 6% from the same quarter in 2020.
For April 2022, preliminary estimates of seasonally adjusted retail show sales grew 0.9% from March 2022. Sales were up 8.2% from April last year, and total sales from February through April were up 10.8% from the same period a year ago. Compared to retail sales in 2020 and into 2021, this increase is no surprise, given that many businesses were closed due to the pandemic.
The shift to online shopping during the pandemic accelerated a long-term trend. 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 is likely to keep increasing as the pandemic continues and more retailers shift to online platforms.
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 high-value competitive advantage have fallen behind. Instead, 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.
Cars, mortgages, credit card balances, and student loans make up a large portion of consumer debt. Spending drops when consumers take on too much debt or when they lose jobs based on economic circumstances. When the economy recovers, the unemployment rate goes down, and consumers have more money to spend.
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 cut jobs locally and hire abroad. Employees who lose jobs may have to cut back on spending and increase their savings to make up for income shortfalls.
Many analysts look to the Consumer Confidence Index, a measure of how Americans feel about the economy, to predict how likely it is that 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. In August 2021, consumer confidence hit its lowest level since April 2020. Perhaps due to fears of rising inflation as well as COVID-19 variants, this figure has continued to drop into 2022.
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 they can remain in business.