The Consumption Spending Myth

FACT: Consumption spending is 2/3 of Total spending in the economy.

MYTH: If consumption spending falls, then it is likely that total spending falls.

Below is a graph of Personal Consumption Expenditures (PCE) and PCE + Net exports, for the months April 2008 - November 2008. Net exports is another form of spending in our economy (and thus included in the total): net spending by foreigners (that is, spending by foreigners in the U.S. minus spending by Americans abroad).

The PCE series repeats what the press has told us ad nauseum: consumption spending had been falling since June (longer in real terms).

"Net exports" is a small component of total spending, so it is tempting to ignore it. But the bottom series shows that (through Nov) the PCE decline has nevertheless been offset by increases in net exports. November PCE + net exports is higher than every month this year, except perhaps June (according to the BEA, June was a mere 0.04 percent higher than November).

PCE has fallen in large part because oil is cheaper. But oil production is not our major industry, which is why we continue to produce even while we do not continue to spend (as much).

Government spending (not shown) has increased throughout the year, so that investment is the only spending category that is unknown for Q4.