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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. The conventional thinking about the importance of consumer spending comes from this chart (all numbers are taken from the latest GDP release).


In this chart, PCE dwarfs everything else. If you just look at the BEA’s numbers you see that personal consumption expenditures in the second quarter were running at a $10 trillion annual rate, 70.7% of the $14.1 trillion GDP figure.

But when you actually look at the detailed breakdown of PCE, you get a much different picture. I divided PCE into five categories, like this.


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. Households lay out money, which primarily goes to support domestic production and employment.

But then we come to 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.

For such import-intensive goods, a $1 of consumer spending does not correspond to a $1 of domestic activity. 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.

[Important note: This is a very very rough breakdown]

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 nonfarm 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. However, households don’t have any direct short-term control over this spending. You can’t say to yourself, oh, I’m going to pay a little less rent to myself this week, and use less of the house. Or you can’t say to the bank, oh, I’m not going to write any checks this week, so why don’t pay me a bit more interest.

To put it another way, payments for imputed services don’t directly drive economic activity. They are basically entries which make the government’s economic books balance.

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 healthcare category totals roughly $2 trillion, or 15% of GDP. But in fact, only about (roughly!) 15% of healthcare spending is “out of pocket”. The rest comes from government or through employee health plans.

And now we come to the final catch-all category, which I have 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 (I’m relatively sure) 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.

So how does this all add up? The stories I cited at the beginning of this post wanted to argue that cutbacks in consumer spending was going to hold back growth. But in fact, the portion of PCE which is both under the control of households and drives domestic production, is really quite smaller than 70% of the economy.

How much smaller? Let’s make a back-of-the-envelope calculation. Let’s assume that $1 spent in category 1 corresponds to $1 in GDP. Simple enough.

But what about the category of import-intensive goods? I’m going to assume that every $1 spent in this category corresponds to only $0.50 of GDP. [Important note: This number is a very rough estimate, based on my read of input-output tables, import penetration ratios, and sunspots. Anybody who wants to come up with a better estimate is welcome to give a try]

Category 4, healthcare, I estimated that out of $1 in spending, only $0.20 was coming directly from consumers (that’s 15%, plus a fudge factor).

Category 3, imputed services, don’t correspond to actual household outlays at all. And category 5 may have some household outlays, but there’s no reason to think of religion donations and charitable contributions to universities, say, as part of consumer spending. In fact, as households cut back on ostentatious consumption, we could actually see an increase in charitable giving.

So when I added this all up, I got that households actually lay out about $5.5 trillion a year which drives domestic economic activities—about 40% of GDP.

Now, I had to make an insane number of heroic assumptions to get here. However, even if we make different assumptions, the conclusion is still true. Household outlays are an important driver of economic activity, but healthcare and ‘social’ outlays—driven by a different dynamic—are important as well.

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Reader Comments

Brandon W

August 29, 2009 08:40 PM

But what happens when consumers stop spending? It's not just the direct spending, but the spending that will be cut if consumers reduce spending, right?

And with the amount of economic activity that comes from government spending these days, what happens as governments are desperately hacking spending right now?

Just questions... I don't have answers to them, yet. What do you think?


August 29, 2009 11:37 PM

Let's not forget that, in a non-recession economy, the American dollar turns over on average of 17 times.
When we turn off that spigot, the ripple effect is chilling.


August 30, 2009 05:24 AM

What does it really matter whether people think consumer spending drives the economy or not? Do you have a larger point to make? So what if imported goods don't help the US economy, they help the global economy. As for imputed services, you can actually use less of a house, you can rent out a room and then share the rest of the house with that person, just as my landlord is doing this week. As for pegging personal medical spending at just 20%, that's plain silly. Obviously all spending by private plans is personal medical spending, pushing that number up to 60%, claiming otherwise is like saying money saved and then spent later somehow doesn't count. Technically you could say the same for the 40% paid by the government too but that raises the silliness of this whole exercise to the forefront: why bother splitting up GDP into govt vs personal categories, only to make some trivial claim that personal spending drives the economy? Of course it does, govt is just a parasite on private spending and what's appalling is how this infestation has now reached 30%, equivalent to finding a huge tapeworm in your intestines. ;)

Alesandra Popa

August 30, 2009 10:49 AM

Spending cannot be 70% regardless of the country. In my country, the Rent a Car Review estimates than more than 20% of GDP goes on premium cars


August 30, 2009 01:23 PM

The real problem is when a dollar is spent on foreign goods or service the dollar doest turnover as much as if it were spent on a domestic good or service. That's the real problem with having such a high trade imbalance.


August 30, 2009 03:15 PM

Anyone is free to adjust a published national accounts concept to make an argument so long as accounting identities are preserved. When you subtract from personal consumption expenditures, the amount must be either added to another sector or subtracted from the whole. This is violated by your treatment of imputed services which you remove from PCE but do not remove from GDP.

Your other adjustments can be accounted for though you don’t specify what you would do. Expenditures by nonprofit institutions serving households could be moved to a new sector made for the purpose. Instead of subtracting all imports in the foreign transactions account, import purchases could by identified and allocated to (subtracted from) the other sectors. This would more directly answer the question “Who receives U.S production?”

I don’t agree that there is a substantive difference between government transfer payments in the form of Social Security and in the form of Medicare. The Medicare payment may not pass through the hands of households but the production is received by households.


August 30, 2009 04:21 PM

not sure then you have argued yourself into a hole. if you subtract all imported goods from PCE, then you must remove them from GDP this reducing GDP size by that amount. and if you remove all of the categories from PCE, then you end up with GDP being 5.2 trillion less. and I doubt without the consumer being involved that any of that 'spending' would happen would it? and removing that means we actually only have a 8.9 trillion dollar economy, with 4.8 trillion coming from PCE right? which means that the government and business share whats remains. we know that government spending is about 2.3 trillion per year, which means that business spending is around 1.8 trillion. if that. a lot of business 'investment' only happens because of consumers, without which they would never spend any thing.


August 30, 2009 04:40 PM

This is kind of like argueing that the "T" in Titanic should have been slanted slightly to give a more windswept look to the name; as the deck chairs float over the rail.


August 30, 2009 11:38 PM

Excellent enlightened me..thanks for the insight.


August 31, 2009 12:31 AM

Man, I hope that your textbook is clearer than this post. I think that your point is that it is a mistake to think that PCE is an amorphous blob of spending. The imputed portion, and the portion driven by government spending acts as an automatic stabilizer because these are insensitive to things such as changes in consumer confidence, changes in employment status, the wealth effect, changes in interest rates, etc. On the other hand, the out-of pocket portion can be quite volatile. To the extent that government has grown over the past decades and home ownership has reduced the cash-flow portion of housing services, the economy is more stable. In other words, a consumer funk that might have caused a depression in the 1930s would only cause a recession now.

Joe Cushing

August 31, 2009 07:23 AM

You're kind of beating a dead horse with those of us who read your blog but I do want to point out one thing. Maybe you should send a letter to editors.

The price you pay for a good in a store (except cars) is about 2 to 6 times the cost of manufacture. Most of the cost comes before and after manufacturing. That means consumer purchases of imports have a big effect on the national economy.


August 31, 2009 11:00 AM


Thanks for these insights! I have been trying to decipher these GDP figures for a while. I have one question based on your analysis. Given that the U.S. trade deficit has shrunk dramatically over the last couple of years, shouldn't we be seeing a large drop also in the "Personal Consumption" ratio? Does not seem that it has budged much. Is this true, or is the government just filling in the gap with automatic stabilizers and new stimulus spending?

G. Watson

August 31, 2009 11:03 AM

Nice try on your advocacy for either communism or socialism. Almost had me until the end when you said "healthcare and other social outlays- driven by another dynamic". Your other dynamic is a redistribution of wealth or "To each according to his need, from each according to his ability"-J. Stalin.Why? Because, the 30% IS spend by the people that spend the's just REDISTRIBUTED from there pockets in other ways. So, if you don't have the consumer that doesn't have the 40% to spend, you don't get the redistribution of the 30% that was his/hers to begin with. The 70% calculation understands this, you don't!! Because in your world you probably the redistrbution is just fine. The 70% calculation understands if you burden people that earn, you will criple everyone that recieves. Abe said it best. "You cannot strenthen the weak by weaking the strong"..Your other dynamic advocates just that.


August 31, 2009 12:18 PM

First, if imports don't count as domestic activity, should it be taken out of the GDP? If this is the case, then GDP is not 14 trillions.

Second, it doesn't matter who pays for it, but who spends it. For example, the medicare, if my grandpa doesn't need the knee replacement, the government won't pay for it, therefor, the money is not spent.

Alton Drew

August 31, 2009 01:29 PM

I appreciate the author's in-depth analysis but in the end, the PCE is just that--an indicator of what is spent on or by the individual consumer in aggregate. These items have to be accounted for somewhere. Were it not for the consumer's demand for cars or health care, the amount spent on these items would fall. I can see the argument that government is purchasing 85% of health care but the expenditure is for the consumption of health services by the end-user, the consumer.

Nurhisham Hussein

August 31, 2009 01:33 PM

To all those commenting on the imports thing:

Michael's right, imports do not count as domestic economic activity, even though spending on imported goods is included under PCE.

Should it then be excluded from GDP? Yes it should. In fact it actually is and always has been. The bottom-line GDP figure you see is actually already net of imports.

If you check the line items in the BEA GDP report, trade is reported as net exports i.e. exports less imports. That's the figure that is actually added to GDP.

Nurhisham Hussein

August 31, 2009 01:39 PM

To all those commenting on the imports thing:

Michael's right, imports do not count as domestic activity even though spending on imported goods is counted under PCE.

Should imports then be excluded from GDP? Yes, it should - in fact it is and always has been. The GDP figure you see is actually already net of imports.

If you look at the line items in the BEA's GDP reports, trade is reported as net exports i.e. exports less imports. That nets off consumption spending on imports reported under PCE.

Richard Michael Abraham

August 31, 2009 03:21 PM

Americans, Keep Holding on to your Purse Strings, Good for You. Only when smart consumers stop consuming will be see a flushing out of "too big to fail" Wall Street firms. It's no longer the United States of America, it's been renamed "The United To Big To Fail Corporations of America." And the U.S. Government relies on these "to big to fail" Wall Street Corporations, How can anyone forget a few days after the terrible tragedy of 9/11, how President Bush spoke to all American citizens?

All of us thought we would hear comforting words but instead, in this saddest moment in American history, the President could only think to say words to the affect, “My friends, what you need to do is go shopping.”

Approximately, according to economists, 70% of the United States’ GNP is based on American consumer spending. Indeed, the World economy depended on Americans to spend their money buying goods and services. American citizens’ consuming kept the economy going in the United States and Worldwide.

Now, Americans, financially crippled and hurt so badly, have gotten smart, and are being patriotic to themselves, fearful of the economic deception, Wall Street corruption, Madison Ave. slick consume campaigns, not to mention the many perverse or corrupt senators, congressmen and governors.

And from lessons learned the hard way, Americans are, for the first time and correctly so, holding on to their purse strings.

The U.S. Government is pouring billions of dollars into the economy, all borrowed money. That will create such a deficit, that the interest alone on the debt will turn the “dollar” into 70 cents, thus causing the worst inflation in American history.

That means that every dollar saved by Americans now may only be worth 70 cents in the future.

Still, 70 cents on the dollar, is 70 times greater than the Americans who now use all of their discretionary money to consume. Those who consume their dollars now will have zero left.

Saving your money now is the very safest way to survive what’s ahead of us.

The options are not promising. Buying durables e.g. cars, appliances, etc., are nice to have, but fall about 20% in value the moment delivered to you. Buying stocks in an insider/player stock market is guaranteed to wipe you out, because of stock market insider/player manipulation.

Indeed, the most favorable position is to have a job or income, and instead of consuming or investing, save, save, save.

Wait for all the cookies to crumble and then, and only then, buy at the very bottom. We are not even close yet to the bottom as recently suggested in talk of recovery, e.g. more existing home sales, slightly increased new home construction. What is causing recent housing “green shoots” is the amount of foreclosures, short sales and tax credit first time buyer home purchases. The foreclosures and short sales will continue, and unless extended, it’s already almost too late for tax credit first time buyers to close before the deadline. Indeed, without the tax credit, realtors and builders will start to see less traffic as I write this article.

Anyone considering consuming or spending their money, this time around, has a patriotic duty to their wellbeing to wait until January, 2010.

I forecast that between now, September through December, 2009, the U.S. Economy will show it’s true colors. I forecast that the artificially driven rise in the stock market, fully manipulated by the players and insiders will soon sharply fall. Americans, Keep Holding on to your Purse Strings, Good for You.


Richard Michael Abraham, Founder

The REDI Foundation


September 2, 2009 09:00 AM

Considering some of the comments, I think you can write more about the calculation of GDP. One question, though:

Is there a big difference with other countries' GDP and PCE calculations that changes the picture of USA as a consumption-heavy economy?

Scot Griffin

September 3, 2009 01:43 PM

I have many problems with how the BEA reports GDP and how the media spins the data.

First and foremost, as Mr. Mandel has previously noted, GDP does not measure production but domestic consumption of domestic goods and services.

Second, businesses consume domestic goods and services. Where do we find business consumption in the GDP data? Capital investment is captured in the investment data, and I assume that wages and salaries are captured after the consumer spends, but what about operating costs, i.e., expenditures made to vendors for goods and services that cannot be capitalized? I have to assume that such business spending is embedded in the PCE data because a significant the BEA also tracks GDP data by industry sector, and some of those sectors sell predominantly to other businesses and not directly to the consumer. For example, Dell's enterprise sales dwarf its end consumer sales, and all of Dell's sales get lumped into the computer hardware segment.

Third, most goods purchased by individual consumers are, in fact, manufatured somewhere else and the entirety of their sales price cannot, by definition, be included in the GDP calculation. Perhaps the mark-up is, or maybe I am just completely missing something. All I can say is that the BEA data for 2008 says we consumed imported goods having only two thirds of the we goods we consumed that were produced domestically, which I just don't consider plausible. Maybe it's food products, but even then a lot of our fruits and vegetables come from Mexico and South America.

Fourth, we get to the implausible spin that consumer spending is 70% of GDP, which for the reasons that Mr. Mandel has cited and the additional reasons I give above, simply cannot be true.

But why does it matter if consumer spending is 70% or 40% or (I think) closer to 20% of GDP? GDP is GDP, right? Wrong. GDP only measures the quantity of consumption, not its quality. For example, the jobs that are being created today are not of the same quality as the jobs created forty years ago because services are now two thirds of GDP (instead of about 45%). Worse, politicians make economic decisions based on what will keep the economy growing, and they view GDP growth as economic growth. If the individual consumer is really only contributing 20% of GDP, or even 40% of GDP, the invididual consumer's voice goes unheard. This is why you are seeing bailouts of Wall Street instead of Main Street.

Tim Miltz

September 4, 2009 07:25 PM

Awe - I didn't make it in.

Bottom line education is the only way in, and the only way out.

Economics is only ever one avenue to exploring the human condition.

I didn't see anything wrong with g/sqr(e)=c^2/m - works for me.

Can theorize on economics all you want - I stand by that offering.

Sue me if I play too long.

Brilliant realization I see is we don't always win - unless we think big enough of ourselves collectively.

Go ahead Mandel- weed the garden- just be careful not to clear out plants that may have unseen utility from your POV.


September 5, 2009 07:54 AM

You have forgotten that the taxes the consumers don't get to spend on what they need or want also contribute to the economy.

They power government, and the fund government infrastructure projects and wars.

If you were to add them back into the mix, you might find yourself at the 70% mark once again.


September 9, 2009 07:55 PM

Good to hear you on NPR, Michael.

william robinson

September 9, 2009 08:08 PM

i have a long suspicion of the 70% metric, so oft quoted, being inflated.

even the unemployed still spend w/ comp monies.

i believe 40% is closer to the actual.


September 14, 2009 10:56 PM

What matters in the crisis context is what people could stop actually paying, because they cannot aford or they prefer to save.
In this context, public health spending is not concerned.


October 19, 2009 10:35 AM

Good article. Why is "what we spend our money on not given more consideration by economists?" I have always taken the position that it helps the economy more to spend on a tool than on an expensive steak. It also helps more to spend on something produced here than imported. Is my thinking strange?

women's ugg boots

November 26, 2009 12:04 AM

Rent a car Bucahrest

January 27, 2010 04:07 AM

I think you’re absolutely right...thanks for the insight.
Rent a car Romania


February 17, 2010 11:04 AM

I'm at the present time listening to the president touting his job creating. He said that a paver in Pa.will hire so many what I call short time jobs. I was at the local Wal-Mart and I saw people buying, but most of what they spending it on did't create one manufacturing job.Let us get real we need to start manufacturing things that people use everyday year after year.


February 17, 2010 11:04 AM

I'm at the present time listening to the president touting his job creating. He said that a paver in Pa.will hire so many what I call short time jobs. I was at the local Wal-Mart and I saw people buying, but most of what they spending it on did't create one manufacturing job.Let us get real we need to start manufacturing things that people use everyday year after year.


February 17, 2010 11:04 AM

I'm at the present time listening to the president touting his job creating. He said that a paver in Pa.will hire so many what I call short time jobs. I was at the local Wal-Mart and I saw people buying, but most of what they spending it on did't create one manufacturing job.Let us get real we need to start manufacturing things that people use everyday year after year.

Thank you for your interest. This blog is no longer active.



Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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