A bad number for consumer spending

Michael Mandel

TEXT OF INTERVIEW

Kai Ryssdal: Of all the economic numbers, reports and statistics that you hear on this program, one is used way more than any other. The often-repeated claim, here and elsewhere, that consumer spending makes up 70 percent of the American economy. BusinessWeek magazine's chief economist Michael Mandel has heard business journalists use that phrase one time too many, so he did what economists do and added it up for himself and blogged about it. And he says the real number is a good deal lower than 70 percent. Mike, it's good to talk to you.

MICHAEL MANDEL: Oh, glad to be here.

Ryssdal: First things first, we're not just making this number up, right? The Department of Commerce is the one who comes out with this 70 percent of GDP figure.

MANDEL: Well, what happens is the Bureau of Economic Analysis, which is part of the Department of Commerce, publishes what they call personal consummation expenditures, and those come to 70 percent of GDP. And that's why people talk about consumer spending being 70 percent of economic activity.

Ryssdal: OK, break it down for me then, because that's what you did in this blog post last week.

MANDEL: It turns out that personal consumption expenditures actually include all sorts of things that really aren't what we think of as consumer spending. For example, when you go out and you buy a haircut, that's pretty straightforward. You're paying for the time of somebody who lives and works in the U.S. But what if you go out, and you buy a clock radio, which is made by somebody in the Philippines. Well, that's consumer spending for sure, but it's doesn't correspond completely to economic activity in the U.S. You're spending the money for sure, but it's not turning into U.S. economic activity.

Ryssdal: There's no dollar for dollar correlation.

MANDEL: There's no dollar for dollar correlation. In fact, maybe half the dollars you spend there actually translate into U.S. economic activity. And the other thing is that the BEA uses the personal consumption expenditure category as a kind of catchall for all sorts of other things that frankly you and I would not think of as consumer spending.

Ryssdal: Yeah, you had some great examples. I mean, rent basically is one of those, right?

MANDEL: Well, what happens is suppose you own your own home. According to the way the numbers are done, they count it as if you are paying rent to yourself. We also have all of the health-care expenditures in this country. So, take Medicare, for example. You and I think about that as a government expenditure. But from the point of view of the government statisticians, they count it as consumer spending.

Ryssdal: Get me to the moral of the story, then. I mean after you did all this math, and you broke it down, and you added it up, is there a way to for us to think of direct out of my pocket consumer spending, and how much that impacts gross domestic product?

MANDEL: Consumer spending out of pocket expenses are probably closer to 40 percent of GDP than to 70 percent. And the reason why this is important is because if you say 70 percent, then you think, oh heavens, there is no way that the U.S. to grow as long as consumers are strapped.

Ryssdal: Did you call the BEA, the Commerce Department and say, hey, listen your figures are a little funny here.

MANDEL: I have a long time continuing dialogue with the wonderful folks at the BEA. I actually think that this is not so much their problem but it's a disjunction between the media and the statistics, which is there are ways that economists do things that makes sense to them, and then it gets translated kinda off in the media. And this one is a particularly bad one at this point. Because you don't want to give people the impression that we have to be a consumer-driven economy. We don't have to be. We are not totally right now. And you sort of say, OK, how else can we grow? There are other ways to grow.

Ryssdal: Michael Mandel from BusinessWeek. Mike, thanks so much.

MANDEL: Oh, you're so welcome.

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