It seems most people understand, personal consumption drives the American economy. Personal consumption historically represents 70% of our nation’s GDP.
In part II our series examining gross domestic product as a means to understand what is holding back our nation’s economic recovery we will examine personal consumption expenditures using the expenditure approach:
C + I + G + (X - M) = GDP
C = Personal Consumption Expenditures
I = Gross Private Fixed Investment
G = Government Expenditures and Investment
X = Net Exports
M = Net Imports
Attempting to balance the playing field for all readers, we will use the following definitions which include hyperlinks for those wishing to enhance their comprehensive knowledge of the material presented.
The personal consumption expenditures price index (PCE) measure is the component statistic for consumption in GDP collected by the Bureau of Economic Analysis. It consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.
Personal consumption expenditures are officially separated into three categories in the national income and product accounts: durable goods, non-durable goods, and services.
Durable goods are the tangible goods purchased by consumers that tend to last for more than a year. Common examples are cars, furniture, and appliances. The two most important subcategories of durable goods in the National Income and Product Accounts are "motor vehicles and parts" and "furniture and other household equipment." Durable goods purchases are usually about 10 to 15 percent of personal consumption expenditures. This percentage tends to be at the low end during business-cycle contractions and at the high end during business-cycle expansion.
Non-durable goods are the tangible goods purchased by consumers that tend to last for less than a year. Common examples are food, clothing, and gasoline. In fact, the three most important subcategories of non-durable goods in the national income and product accounts are listed as "food," "clothing and shoes," and "gasoline and oil." Non-durable goods purchases are usually about 25 to 30 percent of personal consumption expenditures.
Services are activities that provide direct satisfaction of wants and needs without the production of tangible goods. Common examples are information, entertainment, and education. The four primary subcategories of services in the National Income and Product Accounts are "housing," "household operation," "transportation," and "medical care." Expenditures on services are the largest of the three consumption categories, coming in at about 55 to 60 percent of personal consumption expenditures.
By extension C = Durable goods + Non-durable goods + Services
To place the importance of personal consumption expenditures in context, during 2011 the nation’s GDP was $15.1 Trillion. Personal consumption expenditures accounted for $10.7 trillion of that total!
While none can deny the critical role of personal consumption expenditures in our economy, what far too many do not understand is how far and how fast expenditures have changed
In 2011 expenditures on goods contributed $3.6 trillion in 2011, nearly one-fourth of total GDP. That is a very significant portion of expenditure yet only 7% of GDP today is expended on durable goods such as automobiles and furniture. Non-durable goods, such as food, clothing and fuel contribute 16% toward GDP.
Per the U.S. Census Bureau’s September 2012 report, Americans spent $45.8 billion at gas stations. That total actually exceeded what we spent as a nation in restaurants and bar $44.1 billion. But for all the expenditures we make on goods, it is our service expenditures which actually provide the bulk of personal consumer expenditures.
This was not always the case in America. As late as 1968, American expenditures on total goods represented nearly 40% of GNP. Today, expenditure on services actually exceeds that amount as they totaled 46% in 2011.
American expended more than $7 trillion on services in 2011. A large driver of this growth has been the dramatic increase of the financial services and health care services industries. If there is a positive note on this change in expenditures it might be services are both consumed and produced domestically, as they are difficult to export. Housing and utilities, health care expenditures, financial services and insurance, and food and accommodations accounted for three-fourths of all service sector spending.
Which leads us to the premise of this essay series, if we understand what constitutes the components of our GNP, Why haven’t we been able to more significantly enhance economic growth and by extension lower unemployment?
Academics will contend, America has attempted both traditional and nontraditional methods for stimulating economic growth. Multiple fiscal and monetary policies been run out in succession trying to sway our nation’s purchasing decisions. Some have been more effective than others such as Cash for Clunkers and the variety of federal mortgage refinancing programs.
Yet even these have not achieved the levels of participation hoped for. As example, less than a quarter of the hoped for federal mortgage refinances have been processed. Multiple economic and psychological explanations have been put forth regarding the tightening of America’s spending habits. Consumer confidence repeatedly is cited as an implement to increased economic growth. Our ongoing rate of heightened unemployment/underemployment is noted as limiting spending expansion. Retrenchment of household debt garners support for reductions in discretionary spending by consumers.
Yet some small progress has continued as noted by the BEA’s September report, eal gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.7% in the second quarter of 2012 (that is, from the first quarter to the second quarter), according to the "second" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 2%.
The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, non-residential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment and from state and local government
For information on revisions, see "Revisions to GDP, GDI, and Their Major Components."
All of which leads us into our investigation of I; gross private fixed Investment the next essay of this series exploring Gross Domestic Product and its effect on the economic recovery.