Understanding the Consumers in Consumer Spending
Economists often debate what drives the economy. On the one side there are those who emphasize the role of consumer spending, which accounts for 70 percent of the economy (demand side). On the other side, there are economists who emphasize the role of business investment and spending (supply side). In my opinion, this argument is a bit like arguing about whether right or left ventricle of the heart is more important, when in fact, both need to be in good working order for a healthy heart. In the economy you need to have a healthy level of consumer spending (that is sustainable and not fueled by debt or gimmicks) as well as investment and business to business spending (that is sustainable and not fueled by debt or gimmicks).
In the midst of this debate, the actual consumers that drive that spending are largely ignored. Looking at aggregate consumer expenditures by income, the largest share of consumer spending is driven by households with incomes between $100,000 to $149,999, followed by households in the $70,000 to $99,000. Consumers at the highest income level ($200,000 or more) are only third in terms of aggregate consumer spending.
Consumers at the highest income level ($200,000 or more) are only third in terms of aggregate consumer spending.
Why? Part of the answer has to do with the number of households in these income groups. Because of their number and their spending patterns, households that earn between $15,000 to $29,999 contribute more in aggregate to the economy than do households that earn $150,000 to $199,999. If we were to better align our tax and fiscal policies to support the middle class and the working class, it would have a significant economic benefit.
It is also instructive to see where that spending goes. Overall, expenditures related to housing dominate consumer expenditures with personal needs in second place. Consumers spend most of their dollars on the homes they own, but spending on groceries (food at home) is slightly more than spending on rental housing. Transportation accounts for the third largest share of spending, with most of that driven by vehicle purchases.
With a better sense of which consumers are fueling demand, and what they are demanding, we can develop better insights into how business spending and investment can react to that demand.
At Fourth Economy, we believe that the economy should serve the people - it should provide for our basic needs. If it doesn't then what is the point of business spending, production and investment? With a better sense of which consumers are fueling demand, and what they are demanding, we can develop better insights into how business spending and investment can react to that demand.