Consumption Spending Is 70% of GDP: So What?

Thursday September 23rd, 2010   •   Posted by Robert Higgs at 12:40am PDT   •  

It must be a condition of employment that a journalist who writes about the current recession include in his article the statement, �consumption makes up more than two-thirds of the economy� or �consumption spending accounts for 70 percent of GDP.� This seemingly simple, factual statement, however, is nearly always intended to carry some explanatory weight, and on occasion the writer spells out this explanation by adding a statement such as, �unless consumers begin to open their wallets and spend more, recovery from the current recession will be impossible.�

At first glance, this journalistic commonplace appears to make sense. Anyone can understand that, say, a store at the mall will not hire additional employees unless its sales increase enough to justify the additional expense. Hence, would-be employees will remain unemployed; they will purchase fewer consumption goods than they would have purchased if they had jobs; and therefore the stores will not hire more workers; and so forth. The circle of a theory of income and employment seems to be closed, and thus an explanation provided for the lingering recession: consumers are not spending enough.

One does not need a Ph.D. in economics, however, to discover that something must be wrong with this way of thinking about prosperity and recession. Checking the national economic accounts produced by the Commerce Department�s Bureau of Economic Analysis (Table l.l.6), one finds, for example, that the most recent quarterly peak in real personal consumption expenditure occurred in the fourth quarter of 2007. This spending ($9,244 billion at an annual rate) equaled 69.2 percent of contemporary GDP ($13,364 billion at an annual rate) � where the data are expressed in dollars of 2005 purchasing power. Real GDP did not fall significantly until the third quarter of 2008. When it reached its trough in the second quarter of 2009, it had fallen to $12,810 billion, down about 4 percent. At that time, real personal consumption spending was $9,117 billion, down only 1.4 percent, and equal to about 71 percent of GDP. Thus, as usual over the course of a boom and bust, consumption spending varied proportionately less than GDP as a whole.

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September 2010