US Personal Consumption/GDP NOT 70% GDP
Or so Michael Mandel insists. From his Economics Unbound/World Economy Blog:
Economics Unbound
Get It Straight: Consumer Spending is *not* 70% of GDP
Posted by: Michael Mandel on August 29
Ok, now I’m getting aggravated. On the front page of the NYT this morning, Peter Goodman wrote
Given that consumer spending has in recent years accounted for 70 percent of the nation’s economic activity, a marginal shrinking could significantly depress demand for goods and services, discouraging businesses from hiring more workers.
And Martin Crutsinger of the Associated Press wrote
Especially in the U.S., consumer spending is essential: It drives about 70 percent of economic activity–more than for most European nations and well above the rates in developing countries such as China.
Both of these fine economics writers have fallen into a subtle but very important trap. They look at the category of GDP which the BEA calls ‘personal consumption expenditures’ and assume that it means what it sounds like: The money that persons, like you and me, spend on consumption.
But in fact, ‘personal consumption expenditures’ in the U.S. is a grab-bag category which includes all sorts of money–like Medicare spending by the government–which never passes through the hands of households. PCE also includes all the consumer goods imported into the U.S.–cars, computers, clothing, and the like–which create very little economic activity in this country.
In fact, by my very rough calculations, the money that people actually pull out of their paychecks and bank accounts to pay for domestically-produced goods and services drives about 40% of economic activity in this country. That’s still large–but the U.S. is nowhere near as dependent on consumer spending as people think.
Okay. Let’s look under the hood…
