Consumer Spending Is Vital to GDP Growth

When the latest retail sales report showed an admittedly small rebound from the January sales slump, some investors may have let out a sigh of relief.

Nothing eases recession fears in the U.S. like a sign of robust consumer spending, because personal consumption expenditure, which includes consumer spending on goods and services, accounts for more than two thirds of U.S. GDP. And more importantly, consumer spending has kept the U.S. economy ticking along nicely in recent years, accounting for 82 percent, 59 percent and 67 percent of real GDP growth in 2022, 2023 and 2024, respectively.

In 2024, personal consumption expenditure, which comprises of roughly 30 percent spending on goods and 70 percent spending on services, amounted to $19.8 trillion, up 2.8 percent from the year before when accounting for price changes.

While private investment and government spending grew faster than that at 4.0 percent and 3.4 percent, respectively, last year, their contribution to overall GDP growth was still considerably smaller due to their smaller weight in the gross domestic product.

As our chart shows, consumer spending contributed 1.87 percentage points or 67 percent to the overall GDP growth of 2.8 percent last year. Gross private investment and government spending contributed 0.73 and 0.57 percentage points to overall growth, respectively, while the contribution of net exports was negative due to a growing trade deficit.