Consumer spending is closely watched because it accounts for 70 percent of total economic activity.
No, it doesn’t, Martin. Every time a journalist says that consumer spending accounts for 70 percent of total economic activity, he or she is misleading readers into believing that the U.S. economy cannot grow without the consumer taking the main role (see my earlier posts here and here).
In fact, the meme “consumer spending accounts for 70 percent of economic activity” pretty much obscures all the major problems with today’s economy.
1) The ’70 percent’ meme blurs the distinction between domestic production and imports, since a big chunk of imported goods are counted in PCE ;
2) The ’70 percent’ meme blurs the distinction between household and government spending, since PCE includes Medicare and other entitlement spending.
3) The ’70 percent’ meme blurs the distinction between household and institutional spending, since personal consumption expenditures includes money spent by nonprofits (best example: Political parties, which are heavily funded by corporations, fall into personal consumption expenditures)
To finish off this rather post, I did some calculations on the sources of growth in real PCE since December 2009.
This table shows that 47% of consumption growth since December comes from spending on import-intensive goods. In particular, the two biggest increases in spending came for ‘clothing and footwear’ and ‘consumer electronics and IT equipment’, two categories dominated by imported goods. You can be sure that when Americans step up their spending on clothing, they are creating very few manufacturing jobs in this country.
Another 13% of consumption growth came in categories where third-party expenditures are important, such as healthcare and nonprofits.
P.S. I’m getting some traction in my fight against the 70 percent meme. See Donald Marron’s post, for example.