What Is The Relationship Between Consumer Spending and Recessions?

Are we in for a recession?

What is all this talk about consumer spending and why it is important? 

In the United States, consumer spending represents about 65% of total US GDP. So, excluding all other factors, if consumers spend 3.0% less, real GDP would decrease by 4.6%. If this decline in consumer spending happens for a few months, we would be in a recession. According to the National Bureau of Economic Research, a recession is a “significant decline in economic activity that is spread across the economy and that lasts for more than a few months.”

Earlier today, Walmart released their report which cut their quarterly and full-year profit estimates due to rising food inflation as consumers are spending less on food and changing what they buy. This report had rippling effects across financial markets and negatively impacted other stocks like Target, Amazon, and Costco.

Some people may have thought that a stock like Walmart would have been a recession safe investment because Walmart sells cheap staple products like food which people need to eat to survive. However, the announcement today proved that thought to be incorrect because consumers can change what they buy. For example, instead of buying organic blueberries, consumers can buy cheaper options like grapes and beans. This in turn results in less money being spent which lowers the GDP.

Is this a self-fulfiling recession? If consumers get scared and then spend less money, would their fear ultimately drive this recession, or are there fundamental economic problems that would drive this recession?

Ultimately, consumer spending is a large factor in determining if we will face a recession.

Thank you for reading this article, and please share your thoughts below.