The Place of Consumer Spending in the American Economy
How Your Money Buys You Help, Change, and Opportunity in America
U.S. consumer spending has long been called the engine of the nation’s economy — and with good reason. It is responsible for the better part of two-thirds of the country’s Gross Domestic Product (GDP), and a good three-quarters of the GDP per person, and is instrumental in virtually every factor that leads to economic success, corporate success, and policy success. To anyone seeking to understand the workings of the U.S. economy, it is crucial to understand how and why consumer spending is so much of a key player.
In this post, we’ll delve into what is consumer spending, the impact it has on the economy, the majority of consumer spending in 2025, and how it’s influenced by interest rates, inflation, as well as credit usage alongside consumer behavior.
What Is Consumer Spending?
Consumer spending -known as personal consumption expenditures (PCE) includes the money that people spend on goods and services. This can be something as mundane as groceries and electricity to more extra expenses such as trips, electronics or eating out.
The Bureau of Economic Analysis (BEA) breaks down consumer spending into three big areas:
Durable goods: Items that last a long time, such as cars, appliances and furniture.
Nondurable goods: Goods consumed in the short term, such as food, clothing and gasoline.
Services The biggest and fastest-growing bucket, consisting of health care, education, entertainment and housing.
Why Consumer Spending Matters
And simply by being so large, consumer spending is the most important thing measuring GDP. And when consumers spend more, it means more revenue for businesses, which often leads to more hiring, expansion and investment. This, in turn, generates more jobs and income — sustaining a virtuous cycle of growth.
On the other hand, a slowdown in consumer spending can be a warning sign. Companies can streamline, hire fewer people, lower their investment hopes. In rare instances, collapsing consumer demand can trigger a recession.
The bottom line: Consumer attitudes and spending decisions are bread and butter indicators of economic well-being.
Plastic and Spending Habits
Credit has been a huge enabler — a threat — to consumer spending in recent decades. But credit cards, notably, give consumers the option to spend money they don’t currently have and manage cashflow or make big purchases.
Totaling more than $1.2 trillion, the overall U.S. credit card debt is at a historic high as of 2025. Though credit fuels consumer demand, elevated interest rates and debt loads can weigh heavily on households’ balance sheets. As a result, spending trends are becoming more conservative, particularly among lower-income consumers.
And it is to some extent also a game of expansion of consumption, driven by credit. These are some of the features of which consumers frequently make use:
Incentive-based programs (cash back, points, travel rewards)
0% APR promotions
Options for Buy Now, Pay Later (BNPL)
Such tools can provide a short-term boost, but run the risk of long-term consequences if not handled prudently.
Interest Rates and Inflation
Two of the most significant macroeconomic determinants influencing the behaviors of consumers in 2025 are interest rates and inflation.
The Federal Reserve has been keeping interest rates high to fight inflation, which makes borrowing more costly. As a result:
That’s a decade high, and a level of pain more severe than all but a few of us can remember.
Both auto and mortgage loans have gotten markedly more expensive, dissuading buyers from big-ticket purchases.
Savings accounts pay higher interest, which decreases one’s propensity to engage in riskier financial behavior.
At the same time, inflation — though lower than its 2022-2023 peak — remains above the Fed’s 2 percent target. This continued price pressure erodes real incomes, particularly for middle or lower income households, causing many to place goods into a “must-have” category and push back spending on non-essentials.
Consumer Sentiment in 2025
Consumer Sentiment No more optimistic since 2025, according to new figures from the University of Michigan and The Conference Board. Though some shoppers say they are felling confident because of low unemployment and rising wages, others report lingering worries about persisting inflation, sky-high housing costs and student loan payments that are resuming following a pandemic-era hiatus.
The split in attitudes is showing up in spending:
Rich consumers remain strong buyers of luxury goods and travel.
Accounts of consumer thriftiness also miss the fact that young people are spending more of their money on experiences — but are frequently borrowing to finance the spending.
Lower-income families are economizing on necessities and cutting back on luxuries, like eating out and entertainment.
The changes are closely watched by retailers and credit card issuers, which can adjust to product offerings, marketing approaches and lending standards.
The Role of Government Policy
Consumer spending is the result of government policy, most notably through taxation, stimulus and social safety nets.
In recent years, federal stimulus checks, expanded child tax credits and temporary student loan forgiveness had helped fuel consumer spending. Many of those programs have since ended, but policymakers are still weighing the impact of those efforts and considering additional tools to help the economy.
In addition, decisions on interest rates—part of the US Federal Reserve’s monetary policy—also attempt to strike a balance between growth in consumer spending and control of inflation. If spending out of cools too far, the Fed could pivot and start cutting rates. If it is and inflation heats up, rates could stay elevated.
Retail Trends and Changing Consumer Consistency
Here’s what retailers and banks are seeing in the way of spending in 2025:
Online shopping is still king, particularly through mobile.
Subscription services have proliferated, particularly in categories like streaming, fitness and meal delivery.
Younger shoppers now are focused on sustainability and consuming ethically.
So-called shrinkflation — receiving less product for the same price — has made consumers more price-sensitive.
Businesses are adjusting with more personalized promotions, loyalty programs and “value” products to win over budget-conscious consumers.
What to Expect Going Forward
Across the board, going forward, consumer spending is likely to continue to be the mainstay of activity — but not without challenges. Key factors to watch include:
Wage growth vs. inflation: Will real wages rise enough to continue to support spending?
Credit conditions: Will creditors make getting a loan more difficult as defaults increase?
Federal Reserve policy: Will interest rates remain high, or will cuts boost demand?
Geopolitical and supply chain risks: Will world events interfere with pricing or an offering being available?
Short-term spending may follow a different path, based on these dynamics, the long-term trajectory – and demand from American households, who will continue to adjust to an evolving landscape and sculpt the economy’s future – is clear.
Final Thoughts
Consumer spending is not merely an economic figure — it shows the confidence, priorities and financial health of millions of American families. Whether at the grocery store or on luxury travel, every payment helps add up to a broader economic narrative.
Awareness among individuals of the power of spending — especially in a high-debt, high-interest rate environment — is crucial. Businesses and policymakers that can monitor and respond to consumer preferences will have the best shot at navigating the shifting terrain of the US economy in 2025 and beyond.
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