Consumer Spending

The financial meltdown and subsequent recession caused a nearly 30-year streak of consecutive growth in aggregate consumption to snap. Since 1980, the combination of job growth, lower savings and easier access to credit enabled US consumers to spend a greater amount than they had the previous year, even during periods of economic hardship such as the bursting of the dot-com bubble. However, the rapid deterioration of housing and financial markets led to a simultaneous tightening of credit and soaring unemployment, crippling incomes and preventing consumers from maintaining their spending habits. As a result, aggregate consumption inched up 0.1% in 2008 and fell 1.3% in 2009.

Not all spending categories were affected in the same way during the contraction. Expenditures on goods, particularly durable ones, declined more rapidly than spending on services or nondurable goods. The hardest hit categories were motor vehicles and parts, gasoline and transportation services. This is not surprising given that a significant portion of travel is to or from work, with widespread job losses diminishing demand for these categories. Additionally, durable goods by definition are usable during long periods of time, and thus, upgrading or replacing older products such as furniture can be put on hold during periods of economic hardship. Meanwhile, expenditures on services generally held their ground or recorded meek growth. However, there were declines even among service providers, with food and accommodation categories slipping in both 2008 and 2009.

Consumer spending grew in 2010 and 2011, regaining the ground it lost in 2008 and 2009. The growth was partially driven by pent-up demand for durables, which were scaled back during the downturn, being unleashed, leading to particularly robust growth within this category. Low interest rates and expanded access to credit enabled consumers to increase spending on large-scale goods. The growth in spending, which has been fueled by declining unemployment and rising disposable incomes, has propelled spending habits. Even as commodity price declines dragged down on energy and fuel prices and key consumption components, spending remained robust. Consumer spending expanded as a portion of total GDP in 2018, being the primary growth factor in the economy. Tightening labor markets and rising home prices supported strong consumption growth in 2016.

In 2017, first quarter results were particularly low, as has been the case for the past several years. Second and third quarter growth exhibited a strong rebound from the first quarter, accounting for seasonal adjustments. Labor markets tightened significantly in 2017, placing upward pressure on wages. Overall, in 2017, the value of durable good spending drove growth to match the 2016 rate. Low unemployment and strong growth continued through the first quarter of 2019.

Since then, economic growth slowed, which weighed on consumer spending. Uncertainty related to the trade war with China, in addition to tariffs within NAFTA countries, continued to weigh on consumers, with some estimates pegging the cost to consumers imposed by tariffs as more than one billion dollars per week. Though the Federal Reserve did cut interest rates three times in 2019 and worries of an impending recession began to spread, low unemployment kept people relatively insulated during the period, enabling consumer spending levels to remain steady.

The COVID-19 (coronavirus) pandemic, combined with the price collapse of crude oil during the first quarter of 2020, wreaked havoc on the economic landscape. In response, the Federal Reserve cut its interest rate target to near-zero in mid-March. Considering that much of the economy was purposely put on ice to slow the spread of coronavirus, the longest economic expansion on record ended. Overall, consumer spending declined 2.5% in 2020, the first decline since 2009 and the worst decline in many decades. The deployment of vaccines during 2021 facilitated economic reopening, driving consumer spending during the second half of the year. Just as well, Congress passed further fiscal support measures, totaling $1.9 trillion in March 2021. The overwhelming nature of the stimulus plan elevated growth prospects for the United States, leading to consumer spending rising 8.8% during 2021 alone as pent-up demand combined with extra disposable income led to heightened levels of consumer spending.

In 2022, mounting demand resulted in supply chain bottlenecks and rising consumer prices, which contributed inflation levels rising to its highest point since the early 1980s. Additionally, global tension amid the ongoing war in Ukraine drove up global energy prices, tempering consumer spending on goods and services. In response to surging inflation, the Federal Reserve aggressively raised interest rates six times in 2022 to ease the effects of inflation. As a result of increased rates, consumer spending slowed in 2022, only rising 3.0%. In 2023, consumer spending growth remained limited by further interest rate hikes as the Federal Reserve once again decided to raise the Federal Funds Rate by a quarter point during May and July. This resulted in a target range of 5.25% to 5.50%. Despite high rates discouraging growth however, consumer spending remained resilient, partially due to job growth throughout the country. As a result, consumer spending grew 2.5% in 2023. After declining rates during 2024 led to continued growth during the year, consumer spending is expected to grow 2.5% during 2025 as rate cuts will happen in the year. The Federal Reserve will slow the pace of rate cuts, waiting for prices to recover sufficiently. In the meantime, tariff decisions will put pressure on domestic markets, temporarily increasing prices and moderating growth for the year.