Personal Consumption Expenditure

Categories: Econ

Consumer spending makes up a big part of the U.S. economy. An estimated two-thirds of it, to be exact. Tracking consumer spending is key to tracking the overall economy. The personal consumption expenditure is the formal way to measure consumer spending.

Okay, so first: consumer spending.

You work at Smushy Love, a company that makes heart-shaped pillows. People buy the pillows...for birthdays and Valentine’s Day, and as a reward for getting their annual cardiovascular checkups. Stuff like that. The money spent on the pillows pays your salary. Customers pay Smushy Love for the pillows. Smushy Love gives some of that money to you in your paycheck. Then your paycheck allows you to buy a host of other consumer goods. You buy food and gas and clothes and electronic toothbrushes and Christmas Tree-shaped pillows...for holiday gifts and/or for Arbor Day decorations. Some of the money you spend on this stuff eventually goes to workers at the companies that make the products. These workers then spend the cash on other stuff. And so on. It’s the economic circle of life. That consumer spending cycle is what represents 2/3 of the economy. Something like $9 trillion dollars a year.

So the spending on consumer goods is crucial. Economists and policy makers need a way to track all that spending. It allows them to see how things are going, and to make predictions about overall economic growth.

Enter personal consumption expenditure.

It’s the fancy name for all that money you spend on knick-knacks and doo-dads. And services, too; consumer spending includes stuff like like oil changes and doctor visits and back hair electrolysis. Personal Consumption Expenditure, or PCE, is the official stat for measuring consumer spending in the economy. In the U.S., the figure is compiled monthly by the Department of Commerce.

The same report also includes details on personal income and disposable personal income, two measures of how much money people make. The government looks at how much Smushy Love is paying you, and how much of that money you're spending. PCE also helps to track changes in prices.

Along with the income and spending data, the government issues what's called the PCE price index. It shows how much prices for consumer goods have changed during the period. The index measures retail inflation. Or deflation, if prices are going down.

Smushy Love overproduced heart pillows ahead of Valentine's Day. Now it's March, and they've got a warehouse full of them. They drop prices to move out the inventory. That drop in prices would show up in the PCE price index.

Smushy Love is now facing lower revenue. They cut your salary. Which shows up in the government report, in the personal income section. Now you have less money to buy other goods. You spend less on clothes and back hair electrolysis. That lower spending shows up in the PCE statistic.

Now to find someone to tweeze your back hair.

Related or Semi-related Video

Econ: What is Personal Consumption Expen...3 Views

00:00

And finance Allah shmoop What is personal consumption expenditure Well

00:08

consumer spending makes up a big part of the U

00:10

S economy an estimated two thirds of it to be

00:13

exact Tracking consumer spending is a key to tracking the

00:16

overall economy Will the personal consumption expenditure is the formal

00:20

way to measure consumer spending Right So first what is

00:24

it consumer spending Example you work at Smooshy Love No

00:32

not that kind of company It's a company that makes

00:34

heart shaped pillows people by the pillows for you know

00:37

birthdays and Valentine's Day as a reward for getting their

00:40

annual cardiovascular checkups You know stuff like that All the

00:44

money spent on the pillows pays your salary Customers pace

00:47

mushy love for the pillows Smoochy Love gives some of

00:50

that money to you in the form of a paycheck

00:53

Then your paycheck allows you to buy a host of

00:56

other consumer goods You buy food and gas and clothes

00:59

and electronic toothbrushes and Christmas tree shaped pillows for holiday

01:04

gifts and or Arbor Day decorations You know stuff like

01:07

that Some of the money you spend on this stuff

01:08

eventually goes toe workers at the companies who make those

01:11

products These workers then spend that cash on other stuff

01:15

and so on It's the economic circle of life all

01:18

right well that consumer spending cycle is what represents two

01:21

thirds of the economy something like nine trillion dollars a

01:25

year So the spending on consumer goods is crucial Economists

01:29

and policymakers need a way to track all that spending

01:32

It allows them to see how things are going and

01:34

to make predictions about overall economic growth Enter the P

01:38

C E or personal consumption expenditure Tracker Here It's the

01:42

fancy name for all that money you spend on knickknacks

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and doodads and services to like you know consumer spending

01:49

includes stuff like oil changes You get for your car

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and doctor visits where you turn your head and cough

01:54

and you know a back hair Electrolysis Personal consumption expenditure

01:58

is the official stat for measuring consumer spending Any economy

02:02

in the US The figure is compiled monthly by the

02:05

Department of Commerce Will the same report also includes details

02:08

on personal income and disposable personal income Two measures of

02:12

you know how much money people make right So the

02:14

government looks at how much smooshy love is paying you

02:17

and how much of that money your spending while the

02:20

PC also helps to track changes in price's Along with

02:23

the income and spending data the government issues what's called

02:26

the P C E price index It shows how much

02:29

prices for consumer goods have changed during that period Well

02:32

the index measures retail inflation basically or deflation of prices

02:37

go down smooshy love overproduced heart pillows ahead of Valentine's

02:41

Day Now it's March and they've got a warehouse full

02:44

of them Then they drop prices Just a blowout inventory

02:47

Well that drop in prices would show up in the

02:49

PC price index It's mushy Love is now facing lower

02:53

revenue for this month Own theory Maybe they cut your

02:56

salary which then shows up in the government report in

02:58

the personal income section Now you have less money to

03:01

buy other goods and you spend less on clothes and

03:04

back hair electrolysis and well that lower spending shows up

03:08

in the PC east at the Now We gotta go

03:10

find someone else to tweeze are back hair with a 00:03:12.688 --> [endTime] discount Get out

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