PCE: The Real Measure of Confidence

We hear it said quite frequently that Personal Consumption Expenditures represent 70 percent of Gross Domestic Product. Such a rough approximation is false, by and large. The last time the PCE was at or above 70 percent was in the 1929-1939 period, thus roughly coinciding with the Great Depression. Thereafter it dropped into the 50s and has been gradually rising in percentage since, as illustrated in the following table:

PCE as % of GDP	Year
79.9	1932
54.9	1942
59.7	1952
61.6	1962
60.0	1972
61.0	1982
64.5	1992
67.5	2002
68.0	2012
68.1	2013

What this tabulation teaches is that PCE is, these days, closer to “two thirds of GDP”—and that when consumer confidence really tanks, the numbers start going up and come close to touching 70 percent. Notice also that the lowest number in that table comes in 1942—when GDP had swollen with expenditures on war. But whether we are nearer 60 or closer to 70 percent, the obvious is staring us in the face. It is what ordinary people spend that makes an economy. And these expenditures are driven by personal necessity and—if PCE is growing at rates above population increase—spending is also driven by personal choice. Such is still the case for this period: the U.S. population grew at a rate of 0.9 percent annually (1999-2013) over against PCE growth at 2.2 percent. (All of the numbers shown here, by the way, are based on real, meaning inflation-adjusted, dollars.)

When people spend money, corporations begin to hire and invest. When demand is sluggish, the economy—unless artificially stimulated by government expenditures—will reflect the public’s lack of confidence.

This, of course, suggests that incentivizing corporations—as by keeping interest rates artificially low—only incentivizes speculation, not investment or hiring. Therefore the Fed, and thus monetary policy, is never enough to produce confidence in the real public, which controls two-thirds of the economy, and only stirs up those at the 1 percent level who are into investing and such.

The following chart shows the relationships between PCE and GDP for the recent 2000-2013 period:

In this period, the GDP generally lags PCE, growing at a lower rate (2.0% 1999-2013 versus PCE which grew at 2.2% in the period). The GDP appears to be waiting; and even when growth of the PCE signals rising confidence, the GDP is following it sluggishly at best. In the most recent survey of consumer confidence, conducted by The Conference Board, Consumer Confidence was up 2.1 points but CEO confidence was down by a point. That illustrates my point. The CEOs are still waiting for a more robust sign of growing public confidence. Meanwhile the markets are reaching new highs—which reflects the confidence of the rootless 1 percent that lives in the clouds.