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 offer services. Some examples are dry cleaners, yard maintenance, and financial services. Personal consumption drives almost 70% 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, making it a key component of GDP.
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. 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. The Bureau of Economic Analysis uses PCE to calculate the PCE Inflation Index. That’s the Federal Reserve’s preferred measure of inflation. It is more accurate than the more well-known Consumer Price Index.
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 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 10 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.)
