Tuesday, December 4, 2012

GDP Breakdown: Personal Consumption Expenditures

Break It Down
The GDP (gross domestic product) gets a lot of airtime and certainly is a bell weather measurement of economic performance.  Here is the technical breakdown from the Bureau of Economic Analysis (BEA) of the various GDP components - going beyond the Econ 101 definition Y=C+I+G+(X-M).  The BEA uses national income and product accounts (NIPA) data to determine GDP and a variety of other aggregates. 

GDP is measured as the sum of personal consumption expenditures, gross private domestic investment (including change in private inventories and before deduction of charges for CFC), net exports of goods and services (exports less imports), and government consumption expenditures and gross investment. GDP excludes intermediate purchases of goods and services by business.
What I want to do, by breaking down the GDP components, is find correlation between personal consumption, government spending (especially deficits) and net exports amongst each other and amongst investment and saving.  I especially want to get a good look at transfer payments by the government to the public: Social Security, Medicare and Medicaid type of stuff.

PCE Defined
Take for instance the case in which a covered worker is laid-off.  That person is eligible for unemployment insurance and can continue to consume (though not at the same rate).  Personal consumption is the largest component of GDP, and is defined from the previously linked document as follow:

Personal consumption expenditure (PCE) (1–15) measures goods and services purchased by U.S. residents. PCE consists mainly of purchases of new goods and of services by individuals from private business. In addition, PCE includes purchases of new goods and of services by nonprofit institutions (including compensation of employees), net purchases of used goods by individuals and nonprofit institutions, and purchases abroad of goods and services by U.S. residents. PCE also includes purchases of certain goods and services provided by general government and government enterprises, such as tuition payments for higher education, charges for medical care, and charges for water and other sanitary services. Finally, PCE includes imputed purchases that keep PCE invariant to changes in the way that certain activities are carried out—for example, whether housing is rented or owned, whether financial services are explicitly charged, or whether employees are paid in cash or in kind.  
The following conventions are used to classify each PCE commodity:  Durable goods (1–16) are tangible commodities that can be stored or inventoried and that have an average life of at least 3 years; nondurable goods(1–17) are all other tangible commodities that can be stored or inventoried; and services (1–18) are commodities that cannot be stored and that are consumed at the place and time of purchase.

Personal consumption (blue) makes up the largest component of GDP. Net exports (green) actually take away from GDP because they are negative.

So in other words, personal consumption is composed of services and goods (which are broken down into durable and non-durable).

 Buying Stuff Is The Economy, Right?
For this series and others I will use two different charts: percent share of total and total value.  I will also use two time frames: Q1 1960 to Q2 2012 and Q3 2002 to Q2 2012.  So without further delay, here are a bunch of charts.
Breakdown of PCE by component total.  Also included are PCE as a share of GDP, and Services as a share of PCE. 
Breakdown of PCE by component percent share of PCE.  Redundant Services/PCE included for enhancement.
Past ten years of PCE total by component.
Past ten years of PCE by component percent share.
These graphs look like a direct expression of the service oriented economy the US has been transforming into.  Either that or service oriented is just a euphemism for lack of manufacturing.  People like their services, so much so that spending on services is 47% of GDP.
Various ways of thinking of consumption of services (PCESV): as a percent of PCE and as a percent of GDP.  PCE/GDP also included.
Heat map of the data from the above graph: from 1Q 1960 to 2Q 2012, presented in the same order as the above graph (PCESV/PCE, PCE/GDP, PCESV/GDP).
About those transfer payments, also from the BEA report (bolding mine):

Personal income (3–26) is the income received by persons from all sources—that is, from participation in production and from current transfer receipts from both government and business. "Persons" consists of individuals, nonprofit institutions that primarily serve households, private noninsured welfare funds, and private trust funds. Personal income is calculated as compensation of employees, received; proprietors’ income with IVA and CCAdj; rental income of persons with CCAdj; personal income receipts on assets; and personal current transfer receipts; less contributions for government social insurance.
Personal income includes transfer payments from the government.  An arcane way of saying welfare?  Obviously people use their personal income to buy stuff lest they resort to debt - unlikely as that is to happen.  Without getting into further definition blocks, personal saving is the disposable income minus personal outlays, and then divided by disposable income.  Disposable income of course in personal income minus taxes, and personal outlays is equal to PCE plus non-tax government payments and interest payments.  So what is personal saving like without transfer receipts?
Personal Saving. A068RC1 is personal taxes.  W055RC1 is personal outlays.
Personal Saving minus transfers from the government to the people.  A063RC1 is government transfer receipts.
I hope my accounting is correct because what I am trying to do is take government welfare out of personal income.  I understand that welfare payments may already be included in the personal saving equation as a component of personal outlays - as in PCE (which includes purchase provided by government like tuition and medical care).  The second FRED chart should be showing what people are saving on earned income.  This of course makes for a negative saving rate.
Personal Saving Rate
Personal Saving Rate factoring in personal income minus transfer receipts.


  1. I like it when a graph turns out to have powerful long-term trends, like your last three here.

    1. I think a lot of the long-term trends in PCE are in the service sector. Total manufacturing sector employment has been going down steadily since the end of the Second World War.