Personal Consumption Expenditures
What Do Americans Really Spend Their Money On?
Definition: Personal consumption expenditures is a measure of national consumer spending. It tells you how much money Americans spend on goods and services.
The goods category includes two sub-categories. Consumer durable goods are long-lasting items, such as cars and washing machines. Non-durable goods are items that households use quickly, like groceries and clothing.
Services are functions businesses provide so households don't have to do it themselves.
Governments, non-profits and household workers also provide services. Some examples are dry cleaners, yard maintenance and financial services.
Personal consumption drives almost 70 percent of economic output. That's measured by gross domestic product. Personal consumption is an important economic indicator. It’s the main workhorse that drives economic growth. For more, see Components of GDP.
What Americans Spend Their Money On
In 2016, American households spent $11.6 trillion. Sixty-five percent went toward services. The biggest component was housing, at $2 trillion. Next was health care, at $1.9 trillion. After these essentials were covered, financial services and hotels/restaurants were next, at $700 billion each. Other forms of recreation and transportation services contributed $4 billion each. Non-profits provided $300 billion in services.
Americans spent one-third of total expenditures on goods.
They spent $2.5 trillion on non-durable goods, such as food, clothing and energy. Durable goods totaled $1.5 trillion. They spent $600 billion on recreational goods, mostly consumer electronics. They spent $400 billion each on automobiles and furniture. Here are the details:
|PCE Component||Amount (trillions)||Percent|
(Source: "Personal Income and Outlays," Table 2.3.6. Real Personal Consumption Expenditures by Major Type of Product, Chained Dollars, Annual 2016, Bureau of Economic Analysis, July 28. 2017.)
Why PCE Is Important
PCE reveals how much households spend on immediate consumption versus saving for the future. Higher consumption levels translate into greater GDP growth in the short term. On the other hand, a higher savings rate is good for long-term economic health. That's because banks use savings to fund loans for mortgages and business investments.
Analysts use the PCE report to understand household buying habits. For example, it shows how shopping patterns change in response to sharp price increases. That happens most often when gas prices rise or fall. In that way, PCE reveals the elasticity of demand. When demand for a good or service is elastic, people cut back even if the price goes up just a little. When demand is inelastic, people continue to buy the same amount despite big price increases.
How PCE Is Measured
The BEA reports on PCE every month. It's part of the National Income and Product Accounts. You'll find PCE in the Personal Income and Outlays report. That tells you how people spend their personal income. They spend most of it on personal outlays. That category includes PCE, interest payments and transfer payments. They put some of it into personal savings.
To create the National Income accounts, the BEA uses the GDP statistics for its base. It must convert the GDP production data to the PCE consumer spending report. How does it do that?
First, it separates out production that goes toward consumer purchases. That includes things like manufacturers’ shipments.
It also includes revenue for utilities, service receipts and commissions for securities brokerage. Second, it adds imports. Third, it subtracts both exports and changes in inventory. That gives it the amount available for domestic consumption. It allocates that among domestic purchasers. It bases the allocation on trade source data, U.S. Census Bureau data and household income surveys.
One problem is that GDP comes out quarterly, and the BEA estimates PCE every month. The BEA uses the monthly Retail Sales report to fill in gaps. Every ten years it revises all its calculations based on the U.S. Census. (Source: “Methodology Papers,” NIPA Handbook: Concepts and Methods of the U.S. National Income and Product Accounts, Chapter 5: Personal Consumption Expenditures, BEA.)