Personal Consumption Expenditures (PCE)

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Definition of Personal Consumption Expenditures (PCE):

Personal consumption expenditures (PCE) include household expenditures and is frequently referred to as consumer spending.

Detailed Explanation:

The gross domestic product (GDP) equals the market value of all final goods and services produced within a country in a given period. Economists use GDP to measure an economy’s size and growth rate. It includes spending by households (PCE), businesses, and government. PCE is the largest component of the economy contributing approximately two-thirds to the United States’ GDP. Furthermore, many business and government investment decisions are in response to household demands, so the importance of PCE in measuring the health of an economy cannot be understated. 

Personal consumption expenditures include durable goods, nondurable goods, and services. Durable goods last for at least three years. Examples of durable goods include home appliances, automobiles, furniture, sporting goods, and jewelry. Nondurable goods are consumed within three years. Included are perishable goods such as milk, which must be consumed shortly after buying. Other items are considered nondurable because they are normally used within three years. Clothing and disposable diapers are examples. Approximately ten percent of household expenditures in the United States are for durable goods, 30 percent for nondurable goods, and a whopping 60 percent for services.  A service is an intangible act that a consumer or business is willing to purchase. An accountant preparing tax returns, a doctor providing medical help, a social worker caring for disadvantaged youth, and a taxi driver offering transportation are examples of individuals offering services. Since services are intangible they cannot be transferred and must be consumed and delivered at the same time. 

What is not spent is saved. Economic growth is slowed when savings increase. Fear of losing a job may prompt households to save more and spend less. One of the objectives of personal income tax cuts and subsidies is to boost personal consumption expenditures by increasing disposable income. A higher savings rate may reduce the PCE in the short-term, but in the long-run savings are needed for banks to use to fund loans.   

The Bureau of Economic Analysis (BEA) is responsible for measuring the GDP and PCE. The BEA publishes the Personal Incomes and Outlays report monthly which provides an analysis of the PCE. Included in the report is the monthly breakdown of spending in BEA Table 2.3.6U. To monitor changes in the PCE and GDP visit our monthly State of the Economy blog.

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