Introduction to Personal Consumption Expenditures (PCE)
Personal Consumption Expenditures (PCE), also known as consumer spending, represent the spending on goods and services by residents of the United States. PCE accounts for about two-thirds of domestic spending, making it a significant driver of the Gross Domestic Product (GDP). Compiled by the Bureau of Economic Analysis (BEA), PCE provides insight into economic strength and the impact of price changes on consumer spending.
Key Takeaways
- Personal consumption expenditures measure consumer spending.
- Constructed and reported by the BEA, PCE data is found in the Personal Income and Outlays report.
- PCE figures include spending on both durable and non-durable goods, and services.
- The PCE Price Index (PCEPI) is a key inflation gauge for the Federal Reserve.
- PCE data influences business, investment, and hiring decisions.
Diving Into Personal Consumption Expenditures (PCE)
Consumer spending is a vital component of the U.S. economy and a key aspect of GDP, making it a leading economic indicator. By assessing PCE, economists and analysts gain invaluable insights into consumer behavior, saving patterns, and overall economic health, allowing businesses to make informed decisions. Furthermore, the PCE Price Index measures inflation, showcasing the importance of tracking PCE.
Personal consumption expenditures have been reported in both current dollars and chained dollars by the BEA since 2012, forming an integral part of its monthly Personal Income and Outlays report. The report comprises:
- Personal Income: Measures consumer earnings.
- Disposable Personal Income: Income available after taxes.
- Personal Consumption Expenditures: Also known as outlays or consumer spending.
Understanding the PCE Price Index
The Personal Income and Outlays report also includes the PCE Price Index (PCEPI). The PCEPI tracks price changes, offering a perspective on inflation within the economy. Derived from PCE data, the PCEPI evaluates price inflation or deflation and reveals changes in consumer spending patterns.
The index provides two crucial figures:
- Overall PCE: Comprehensive spending categories for PCE.
- Core PCE Price Index: Excludes volatile food and energy prices to uncover underlying inflation trends.
Why the Federal Reserve Prefers PCEPI
In 2012, the Federal Reserve adopted the PCE Price Index as its primary inflation measure due to its ability to reflect consumer spending changes accurately. Compared to the Consumer Price Index (CPI), the PCEPI offers a broader range of data, adjusts past data to support current information, and uses reliable business survey data. This comprehensive view allows the Fed to factor in even slight inflation variations, indicating economic growth.
Measuring PCE: Breaking It Down
The BEA reports the total value of PCE monthly, categorizing expenditures into consumer goods (durable and non-durable) and services. Durable goods typically last over three years, while non-durable goods have a shorter life expectancy. Examples of these categories include:
- Durable Goods: Vehicles, electronics, furniture
- Nondurable Goods: Cosmetics, gasoline, clothing
- Services: Legal advice, house cleaning, plumbing
Personal Consumption Expenditure Components
- Durable Goods: Vehicles, furnishings, recreational goods.
- Nondurable Goods: Food, beverages, clothing, energy goods.
- Services: Housing, utilities, healthcare, financial services, and more.
Measurement reflects the spending by households, nonprofits, and U.S. residents abroad, including third-party expenditures like employer-paid health insurance and government-provided medical care. The BEA provides a comprehensive view of consumer spending nationally and by state.
Advantages and Disadvantages of PCE
Advantages
- Provides an extensive perspective on economic health.
- Helps gauge consumer and business behaviors.
- Indicates economic conditions through shifting spending trends.
Disadvantages
- May involve data collection and classification errors.
- PCE figures are estimates and subject to annual revisions.
Recent PCE Trends
In March 2024, personal income rose to approximately $23.83 trillion (up by 0.51%), and PCE increased by 0.8% to just over $19.35 trillion, with the PCE Price Index reflecting a slight 0.3% increase.
Importance of PCE
The personal consumption expenditures number showcases American spending habits, revealing insights into the overall economic health. Tracked monthly, PCE affects inflation tracking through the PCE Price Index.
PCE Price Index vs. Consumer Price Index
While the CPI, compiled by the Bureau of Labor Statistics, surveys urban households on common purchase prices, the PCE uses BEA data to record monthly price changes across a broader spectrum of consumer goods and services.
Analyzing PCE Data
March 2024 PCE data showed a significant expenditure increase and modest inflation, highlighting ongoing economic activity and trends.
Conclusion
Personal Consumption Expenditures (PCE) provide an essential snapshot of economic performance and consumer behavior. Tracking spending patterns, income, and price changes, distinguished monthly by the BEA, informs businesses and economic policies, shaping understanding and decisions across economic contexts.
Related Terms: Gross Domestic Product, PCE Price Index, Consumer Price Index, Disposable Personal Income.
References
- U.S. Bureau of Economic Analysis. “Chapter 5: Personal Consumption Expenditures”, Page 1.
- U.S. Bureau of Economic Analysis. “Consumer Spending”.
- U.S. Bureau of Economic Analysis. “Personal Consumption Expenditures Price Index”.
- U.S. Bureau of Economic Analysis. “Personal Income and Outlays, March 2024”, Pages 1 and 6.
- U.S. Bureau of Economic Analysis. “Personal Consumption Expenditures Price Index, Excluding Food and Energy”.
- U.S. Bureau of Economic Analysis. “What Is the Core PCE Price Index?”
- Board of Governors of the Federal Reserve System. “Monetary Policy Report to the Congress Pursuant to the Full Employment and Balanced Growth Act of 1978,” Footnote, Page 4.
- Board of Governors of the Federal Reserve System. “Statement of Longer-Run Goals and Monetary Policy Strategy”.
- U.S. Bureau of Economic Analysis. “Chapter 5: Personal Consumption Expenditures”, Pages 4-5.
- U.S. Bureau of Economic Analysis. “Chapter 5: Personal Consumption Expenditures”, Page 2.
- U.S. Bureau of Labor Statistics. “Consumer Prices Index Overview”.
