Consumer spending, also known as personal consumption expenditures (PCE), increased 11.3% in the first quarter (Q1) of 2021, according to the first quarter gross domestic product second estimate. This follows an increase in PCE for the fourth quarter (2.3%). 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 Q1 showed that the economy increased by 6.4%. This follows a fourth-quarter GDP increase of 4.3% 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 $15.1 trillion in the first quarter. On an annualized basis, that's an 11.3% increase from the fourth quarter, according to the BEA.
Spending on goods increased by 25.6%. That includes spending on durable goods like automobiles, which increased 48.6% from Q4. Spending on nondurable goods, like groceries, increased by 14.0%. Spending on services, like hair salons, increased by 4.6%.
- Consumer spending, also known as personal consumption expenditures (PCE), increased 11.3% in the first quarter of 2021, following an increase of 2.3% in the fourth quarter of 2020.
- Spending on durable goods decreased by 48.6% during this time.
- Spending increased in the first quarter as governments allowed businesses to reopen after closing due to the COVID-19 pandemic and vaccinations increased.
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 first quarter of 2021 increased 7.8% from the same quarter in 2020, 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. First quarter online sales increased 39.1% over the same period in 2020.
For April 2021, advance estimates of seasonally adjusted retail sales showed no change from March. Sales were up 51.2% from April a year ago, and total sales from February through April were up 27.1% from the same period a year ago.
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 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.
Spending took a long time to bounce back from the 2008 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.
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.
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. In April 2021, consumer confidence was finally approaching pre-pandemic levels, but it dipped again in May.
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.