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1 1 (October 02, 2020)

handle is hein.crs/govdccf0001 and id is 1 raw text is: &~ ~ riE SE .$rCh &~ ~ ~ October 2, 2020 Introduction to the U.S. Economy: Consumer Spending Consumer spending is a key driver of short-run economic growth in the U.S. economy. During the initial months of the Coronavirus Disease 2019 (COVID-19) pandemic, consumer spending dropped at a rapid and historic rate. This In Focus provides an overview of consumer spending, summarizes recent trends, describes its relationship with the business cycle, and discusses policy that can impact and be affected by consumer spending. As defined by the Bureau of Economic Analysis (BEA), consumer spending, also referred to as personal consumption expenditures (PCE), is the value of the goods and services purchased by, or on the behalf of, persons (households and nonprofit institutions serving households) living in the United States. PCE comprises roughly two- thirds of gross domestic product (GDP) and is therefore typically a large component of short-run economic growth. BEA provides PCE data monthly and measures these expenditures in relation to personal income and prices. Transactions included in the calculation of PCE consist largely of the purchases of new goods and services by households, among others. BEA measures the values of expenditure transactions, including sales and excise taxes. Measuring consumption expenditures against income allows for a comparison of how much consumers spend versus save. Tracking what people buy and how much they spend allows BEA to also track fluctuations in price levels, referred to as inflation in the case of rising prices. One of the most widely used sources for measuring inflation is BEA's PCE Price Index. Real PCE (PCE adjusted for inflation) is calculated by adjusting PCE by the price index. Figure 1 shows the pattern of real PCE in the United States between the first quarter of 2005 and the second quarter of 2020. The total personal consumption expenditure data is additionally shown broken out into spending in two main categories, goods and services. Expenditures of both goods and services have increased steadily since 2005, except during the financial crisis and recession of 2007-2009 and the current recession caused by the COVID-19 pandemic. Expenditures on services were consistently 30%-50% higher than expenditures on goods until 2020, when that gap began to close due to falling expenditures on services. In 2020, PCE dropped by a non-annualized 6.6% in March and 12.6% in April notably large monthly decreases. Still, real PCE remained higher in the second quarter of 2020 than in any single quarter of the 2007-2009 recession, although the magnitude of the difference is smaller when population is accounted for. The majority of the drop in total PCE was due to a decline in spending on services, a result of business closures, social distancing, and other measures taken to limit the spread of the virus. Figure I. Real Personal Consumption Expenditures Q I 2005 - Q2 2020 C S-O .... . . . iiiiiiiiiii Source: Bureau of Economic Analysis (BEA). Note: Seasonally adjusted at annual rates. Patterns of consumer spending can be linked closely with broader economic conditions, specifically the business cycle and economic growth. T u .y Cyc ad -P Consumer spending generally follows the pattern of the business cycle. During economic downturns, consumer spending typically decreases as unemployment increases and personal income decreases. In contrast, during expansions, consumer spending increases as unemployment decreases and personal income increases. A strong economy can impact consumer sentiment and spending. Consumer confidence due to economic conditions may increase purchases of durable goods (goods that can be used over a long period of time), such as vehicles or major appliances. In general, spending on durable goods is more cyclical than spending on nondurable goods (goods that are single use or are consumed over a short period of time). Therefore, spending on durable goods should decrease relatively more in a recession as, in theory, individuals have the ability to put off big purchases, such as household appliances, until the economy improves or the need becomes sufficiently urgent. Although this pattern has held in previous recessions, expenditures on nondurable goods have experienced a larger decline than spending on durable goods in the current p\w -- , gnom goo mppm qq\ a , q 'S I 11LULANJILiN,

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