CONSUMER EXPENDITURES – FALLING OR RISING?

National economists have often stated that expenditures by U.S. consumers make up 70% of the national GDP (Gross Domestic Product). In brief, the GDP is the total market value of domestic goods and services produced and consumed in the U.S. within a 365 day period.

However, a recent headline in USA Today proclaimed that consumer spending had grown to 71% of the GDP in the second quarter of 2009. On the surface this could be viewed as another positive sign of an improving economy, but in reality it is not. The real fact is that consumption as a percentage of the economy typically increases during a recession because output in manufacturing, construction, and business expenditures almost always drop first and at a higher percentage than consumer purchases. The result is a smaller basket of economic variables with the consumer taking a higher percentage of the whole.

Taking into account the government’s various stimulus packages that provided credits for first time home buyers, reduced taxes for many, and provided credits for clunkers; it is not surprising that consumer expenditures represented 71% of the GDP. However when you compare the actual dollar amount to last year’s figures, the 71% looks bleaker. For instance, now that credit is tight, wages are stagnant, and unemployment is still growing, consumer expenditures actually dropped 1.9% in the second quarter of 2009 representing a staggering $195 billion loss over the same period in 2008.
Conversely, consumption’s share of the economy has historically been more around the 65% level and it did not exceed 70% until last year. As a comparison, China’s GDP has a consumption rate of 35% down from 49% in 1990 largely because the country exports more than it consumes and the average citizen saves and saves – something Americans are trying to do. The implication is not good for retail over the next year or two, and it may suggest a seismic consumer shift in our economy.