Consumer Spending is Not 70% of the Economy

Journalists, commentators, and economists often say that consumer spending makes up 70% of the U.S. economy. Indeed, it’s easy to find several examples of that claim in today’s coverage of the latest GDP data (e.g., here). And, full confession, I’ve used that phrase a few times myself.

There’s just one problem with the 70% claim: it’s wrong. Consumer spending actually makes up only 60% of the economy.

This discrepancy exists because national income accounting doesn’t always mix well with simple arithmetic. If you look at data for 2009, you will find that consumer spending totaled $10.1 trillion, while GDP was $14.3 trillion, both measured in current dollars. Put those together, and it appears that consumer spending is about 71% of the economy (= 10.1 / 14.3). (You get almost the exact same percentage if you do the calculation with real values, but that introduces other complexities.)

That calculation is so simple, it’s easy to understand why it has a fan club. But there’s a hidden problem. To see it, it helps to do the same calculation for other parts of the economy. Again using current dollar figures for 2009, you will find the following:

     Consumer Spending            71%
     Investment                            12%
     Government                          21%
     Exports                                    11%

Notice anything strange? If you add these four sectors of the economy together, you discover that they account for 114% of GDP. In other words, consumer spending, investment, government spending, and exports, when combined, are one-seventh larger than the total economy.

This apparent paradox—the components of the economy are bigger than the economy itself—is resolved when you consider how the economic data handle imports. In order to determine gross domestic production, the statisticians add up domestic purchases and then subtract imports. So the full national income accounts for 2009 show the following shares of the economy:

     Consumer Spending           71%
     Investment                            12%
     Government                          21%
     Exports                                    11%
     Imports                                 -14%

These figures add to 100%, as they should. They also demonstrate why consumer spending was not really 71% of the U.S. economy in 2009. Total consumer spending was indeed 71% of the size of the economy, but part of that spending went to imported goods (clothes, coffee, cars, etc.). If you want to know how much consumers contributed to U.S. GDP, you need to take the 71% figure and then deduct the portion that was spent on imports.

I am not aware of a simple way to do this calculation using the data in the regular GDP reports. Over at Mandel on Innovation and Growth, however, Michael Mandel provides a useful discussion of a paper that does this calculation for several recent years, including 2008. (Michael deserves credit for taking a leading role in fighting back against the claim that consumers are 70% of the economy.)

The paper, “Induced Consumption: Its Impact on Gross Domestic Product (GDP) and Employment” by Carl Chentrens and Art Andreassen (you can find it in this conference proceeding) makes exactly the import adjustment I described above. For 2008, it concludes that the relative shares are as follows

                                        Unadjusted                   Adjusted

Consumer Spending           71%                           61%
Investment                            14%                           11%
Government                         20%                           17%
Exports                                   12%                            11%
Imports                                 -17%

The authors find similar results in previous years, including 1999, 2002, and 2006.

Bottom line: Consumer spending really makes up about 60% of the U.S. economy. But you’d be hard-pressed to know that from the usual GDP data.

Note: The authors make a second adjustment for “induced activity”, that Michael Mandel also picks up on. That makes the consumer share seem even smaller. I have serious reservations about that adjustment, however, particularly when trying to answer questions about (a) the overall size and composition of the economy and (b) its long-term growth. Thus, I favor the 60% figure.

13 thoughts on “Consumer Spending is Not 70% of the Economy”

  1. It’s a good thing too, because it means we’re only buying 11 percent more than we actually are capable of paying for!

  2. This is both interesting and useful. Let me add one idea. Even if you use the 70% number, consumers do not pay for all that consumption directly. About 10 points of the 70 is for the portion of health care paid for by insurance. In fact, most of the growth in the consumer share is due to growth in health care paid for by insurance. This part of consumption is not particularly sensitive to changes in income since consumers do not pay for it directly.

  3. Douglas Lee — where do the insurance companies get the funds to pay for the health care?

    For the dominant part they get it from the insurance payments that consumers provide to the insurance companies. Even if the consumers employer makes a large portion of the consumers insurance payments it is still compensation to the consumer. A small portion of the insurance payments come from the income on the investments the insurance companies make on the fees they first receive from consumers and hold for a period of time until they have to pay the money out to settle insurance claims.

    Insurance companies are just intermediaries and consumers are still paying for health care, just indirectly.

    1. I agree consumers pay, but not as directly as you suggest. Most of the insurance money comes from two sources — tax dollars and company payments. Remember a big part of insurance is Medicare and Medicaid paid for very indirectly by consumer tax money. Much of the remainder is company paid health insurance. This is a payment made instead of paying wages. Consumers pay, but not by paying insurance premiums directly.

  4. Here is the British plan to wipe off their debt in one night as presented by the Cobden Center:

    The plan starts with the government printing approx £850 billion in cash and injecting it directly into the vaults of the banks and into the checking accounts of individuals.

    Wipe from the bank books all the demand-deposits/IOUs as banks would not owe you money anymore.
    The banks don’t have to pay you anymore; they will suddenly be £850 billion better off.

    The government can now get the money that the banks don’t have to pay back to the people and put it into Mutuals, which would then immediately pay off the national debt.

    They say it is not even inflationary!

    Read more about it here:

    http://www.bigbureaucracy.com/?p=1145

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  6. Don

    Out of the 60% spending how much do you attribute to consumer finance as a share of our economy? Thank you

    Rakesh

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