Consumer spending is 70 percent of GDP. That's not just a statistic I remember hearing once in Macroeconomics class. It's something I read on a nearly weekly basis. It's something I write on a nearly monthly basis: Consumer spending is way down in the recession, and that's terrible because it accounts for 70 percent of our GDP.
But that's simply not true, writes BusinessWeek economist Michael Mandel. Consumer spending -- money coming out of our wallets and bank accounts that contributes to our GDP -- is closer to half that number. Have I been living a lie?
Here's a brief explanation of each color category. Primary domestic goods and services must count as personal consumption. With import-intensive goods (computers, cars, gas, etc) some of each dollar spent goes abroad since much of this category's production is overseas. Imputed services are implicit payments where no money actually changes hands, like what "you supposedly pay the bank for such services as free checking (by accepting lower or no interest on your demand deposits)." Only 15 percent of healthcare goods come out of pocket -- the rest is government and employer spending. And the final catch-all category includes "communal" items like the Democratic Party's yearly spending.
Here's how Mandel adds up the change:
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.
Interesting stuff. And I don't have the ammunition to say he's wrong. Anybody else want to quibble?
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