What Really Happened to Consumer Spending

The previous administration(s) have made definitions that make the economy look better than it is. If the current or future administration starts using more realistic definitions, it will make them look worse.
There are some good comments with this article, too.

http://www.businessweek.com/the_thread/economicsunbound/archives/2009/04/what_really_hap.html

Posted by: Michael Mandel on April 02

Here’s a more detailed version of the analysis in my latest BW story. Right now it looks like personal consumption expenditures have fallen by only 0.4%, or $40 billion, over the past year (that’s nominal dollars). For an economy the size of the U.S., $40 billion is a rounding error.

But that number didn’t seem right, given the devastation in the economy, so I took a closer look. I started with an advantage—I’ve written about these numbers before. When we hear the words ‘consumer spending’ or even ‘personal consumption expenditure’, the image that comes to our mind is a household buying food, clothing, televisions, haircuts, cars, etc etc—all the things we buy in our daily lives. Let’s call these ‘pocketbook’ expenses—we make the decision about whether to reach into our pocketbook or wallet and pay for them.

However, there are a lot of categories in the BEA’s definition of personal consumption expenditures which are not ‘pocketbook’ expenses. In particular, there are four important categories in PCE which shouldn’t arguably shouldn’t count as personal consumption.


1. Spending by religious groups, foundations, and other nonprofits. The BEA puts these into PCE because they don’t fit anywhere else, but they are clearly not household spending. For example, if your church or synagogue around the corner spends more on helping the poor, that counts as consumer spending. Another example: the Bill and Melinda Gates Foundation is raising its spending by 15%, or $500 million this year. To the degree that the money is spent in the U.S,, that shows up in consumer spending.

2. “Imputed” spending, where no cash changes hands, but the statisticians book an expenditure for technical reasons. The biggest of these is “owner-occupied nonfarm dwellings—space rent” –in effect, the rent you supposedly pay yourself for the privilege of living in your home. To put it another way, the consumer spending numbers charge Americans $1.1 trillion for living in their own homes—and that number is rising

3. Money spent by Medicare, Medicaid, and employer health care is mostly counted as part of PCE, even if the payments go directly to the hospitals or doctors and never pass through the hands of households. So to put it, if a senior citizen goes to the hospital and gets a heart transplant, which is completely paid for by Medicare, that is counted as part of consumer spending.

4. Spending for education and research. This has some overlap with category 1, but my main problem is that spending on education on R&D should really be counted as investment, not consumption. Treating this as part of consumer spending gives you the weird result that if a private nonprofit university steps up research, that counts as an increase in consumer spending and a fall in the savings rate.

I added together these four categories of PCE. For healthcare. I took 85% of the total medical spending in the data, because about 15% of health care spending is “out-of-pocket” for consumers.

Altogether, these four categories account for $3.7 trillion, or more than one-third, of so-called consumer spending. Remarkably, these non-pocketbook expenses rose by 4.5% over the past year.

Meanwhle pocketbook spending—all the things that we normally think of as consumer spending—is down by 3.1%, or $200 billion, over the past year. This is by far the biggest year over year plunge since 1959, when the current data series starts. In fact, measured on a year over year quarterly basis, the fourth quarter was the first time that pocketbook spending fell, in nominal terms.