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Consumer spending is the key determinant of overall economic activity, especially in the short-term. First, in terms of the volume of consumer spending relative to the total U.S. economy, consumption accounts for roughly two-thirds of total activity. For example, the total market value of all goods and services produced annually in the U.S. -- as measured by Gross Domestic Product (GDP) -- stood at just over $10 trillion during the third quarter of 2001. Of this, over $7 trillion was purchased by consumers, and is comprised of durable goods (cars, furniture), nondurable goods (food, clothing), and services (health care, recreation). Thus, consumer spending plays a tremendous direct role in determining the overall level of economic activity. Where does the remaining $3 trillion in output go? It is accounted for by private investment, government spending, and foreign trade.

However, we can think of the importance of consumer spending as being even greater than the amount actually spent on consumption. Think of production by firms. Businesses produce output (and therefore employ workers) because there is some ultimate consumer demand for the final output being produced. So, without consumer spending, businesses would not be producing, and businesses would thus stop spending on new machinery and other capital goods. So, consumer spending not only has a large direct impact on overall GDP, it also dictates the extent to which firms would like to undertake new capital investment and production.

For these reasons, consumer spending is being counted on to play a key role in recovering from the current economic downturn. As of November 2001, business production and investment remain depressed. It is unlikely that there will be a business turnaround until consumer spending begins to strengthen to the point where business production and investment must pick up in order to meet the rising consumer demand.

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