A Closer Look At Consumer Spending

by Elaine Schwartz    •    May 5, 2010    •    767 Views

We always hear reporters saying that, “Consumer spending makes up more than 70% of the economy…” Mike Mandel, former chief economist at Newsweek, believes the reporters are misleading us. Yes, the consumer component of GDP is 70% of all spending. But, the consumer is not necessarily doing the spending and the impact might not be jobs and growth.

According to Mandel…

  1. Because a lot of what we buy is made elsewhere, more consumer spending will not necessarily result in more jobs at home. 
  2. Government’s Medicare spending is counted in the consumer component of GDP.
  3. “Imputed services” which include, for example, the rent we never pay on a house we own, are a part of the consumer component of GDP.
  4. Spending by religious groups is included in the consumer GDP category.
  5. As a result, Mandel concludes that consumer spending on domestically produced goods and services is actually close to 40% of GDP.

The Economic Lesson

GDP includes consumption expenditures, gross investment (primarily business spending but also residential housing), government purchases, and exports minus imports (usually a negative number). Alternatively, we can define GDP as the value of goods and services produced domestically during one year. If we assume that actual consumer spending on domestically produced goods and services is a lower number than reported, maybe the consumer is not quite as important as reporters say.  




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