70% Consumer Driven Economy - True or False?

This entry is courtesy of a BusinessWeek article, that I heard summarized on NPR last week. If you do not want to read all the details, bottom line is that true consumer spending is closer to 40% of our economy versus the 70% you hear touted on the airwaves. So do not feel guilty if you are not out spending and helping us recover, because our savings rate is more important in the long run for true recovery and providing a foundation for economic growth.


Let’s start from the bottom of the bar. The first category includes household spending on goods and services which are primarily domestically-produced. That would be things like food, recreation, haircuts, utilities, legal fees, airplanes, auto repair, and so forth. This category—roughly $4.3 trillion, or 30% of GDP—is all ‘pocketbook’ expense.

The second category: Import-intensive goods. These are items such as clothing, personal computers, cell phones, televisions, toys, sporting goods, cars, gasoline, and so forth. These are items where a substantial amount of production is done abroad, either directly or indirectly.
If you buy a shirt or a laptop which is made overseas, much of your money supports economic activity in China or Taiwan, not the U.S. This category is worth $1.7 trillion, or 12% of GDP. The true amount that truly spurs American demand is less than $0.50 on the dollar.

Now we come to the third category of PCE—“imputed services.” What this means is that the BEA assigns a number to certain economic activities, even though no money actually changes hands. The two most important imputed services are “imputed rental of owner-occupied non farm housing” and “financial services furnished without payment”. Respectively, these are the money you supposedly pay yourself to live in your own home, and the money you supposedly pay the bank for such services as free checking (by accepting lower or no interest on your demand deposits). This category—worth $1.5 trillion or 11% of GDP—does represent real economic transactions. To put it another way, payments for imputed services don’t directly drive economic activity. No real contribution.

Now we come to a wonderful category—healthcare goods and services, including hospitals, drugs, doctors, nursing homes, and health insurance. Because of the vagaries of national income accounting, most of the money that the government pays for Medicare and Medicaid, and that businesses pay for employer health insurance, shows up in the PCE category.
To put it another way—if Medicare pays the hospital $25 K for your father’s knee replacement, that money shows up as personal consumption expenditures. If your company health plan pays $30K for the birth of your son—that counts as PCE, even though you never see the money.
The health care category totals roughly $2 trillion, or 15% of GDP. But in fact, only about 15% of health care spending is “out of pocket”. The rest comes from government or through employee health plans. That would equate to about 2% GDP.

And now we come to the final catch-all category, which is labeled “social services, religious activities, R&D, and other similar activities.” This category includes spending by religious groups, such as the Catholic Church. It includes community food and housing relief. It includes R&D spending by private educational institutions, like Harvard. It includes social advocacy groups, like Greenpeace. It includes spending by political parties—Democrats and Republicans alike.
In other words, this wonderful category—totaling about $400 billion, or 3% of GDP—includes all sorts of spending which could be described as “social” rather than “individual”. And it’s funded by individuals, government, charitable contributions, and investment income. Lets assume that equates to another 2% of GDP, that gives us a total of 40%.

Households actually lay out about $5.5 trillion a year which drives domestic economic activities—about 40% of GDP.