Consumer Debt Vs. Spending

The overall health of the economy depends on many factors. These include government spending, inflation, interest rates and export levels. Consumer spending and borrowing trends are also among the most important economic indicators as they represent billions of dollars and give a window into the economic behavior of millions of individuals.

Definitions

Consumer spending represents the money that individuals spend on personal needs. It doesn't include government spending, taxes individuals pay, investments or business expenditures. Consumer spending includes both goods and services from domestic and foreign producers.

Consumer debt, also known as consumer credit, represents how much money consumers owe on loans, including home mortgages and credit cards. Consumer credit is usually measured as a percentage of disposable income.

Relationship

Consumer debt and consumer spending are related, inasmuch as some spending takes place in the form of credit. High levels of consumer debt may be a result of recent consumer spending. While heightened levels of consumer spending bode well for retailers and manufacturers, higher levels of consumer debt mean more money for banks that offer loans and credit card companies that collect interest payments from consumers.

Types

Economists and analysts further divide consumer spending and consumer debt into subcategories. For example, some consumer spending falls into the category or durable goods. These items, which include automobiles, jewelry and appliances, are expected to last for several years or more. Non-durable goods are items that won't last very long or are intended for near-term consumption. Consumer spending in each category of goods gives insight into where people are spending their money, which can be as useful as knowing exactly how much they're spending.

Considerations

Changes in consumer spending and consumer debt result from other changes in the economy. When the Federal Reserve Bank lowers interest rates, it becomes easier for consumers to borrow money. This typically leads to an increase in consumer spending and debt. Rising home values give homeowners the chance to use refinancing and second mortgages to spend more on durable or non-durable goods. Periods of high unemployment are more likely to cause periods of decreased consumer spending, as well as higher debt-to-income ratios.