Despite popular myth (and reporting), the answer is no. Let’s discuss how people arrive at these numbers and why they are wrong.
GDP consists of Personal Consumption Expenditures (PCE) plus Residential and Nonresidential Investment plus Government Spending plus CIPI.
CIPI (not shown) stands for change in private inventories. It is a tiny component that nets to zero over time.
You can find those components on the BEA’s GDP Report, Table 3. Gross Domestic Product: Level and Change from Preceding Period.
Questioning This Calculation
Consumer Spending is What Percent of the Economy?
Do a search for the above title and you are guaranteed to get a misleading if not incorrect answer.
For example US Bank reports “In 2024, personal consumption expenditures represent nearly 68% of the nation’s GDP.”
To arrive at that answer divide PCE by GDP: 15,733 / 22,919 * 100 = 68.65 percent.
But PCE goods is 5,233. Who is creating those goods? Do they appear by magic?
The answer is manufacturers, farmers, miners, oil drillers, etc., are responsible for all goods created.
In addition, the manufacturers, farmers, miners, oil drillers, etc, all need some services to support their businesses, but that is not personal services so is not a part of PCE services.
Real GDP Select Components in Billions of Dollars
From the above chart, we can calculate personal services as a percent of GDP.
Personal Services Percent = 10,500 / 22,919 * 100 = 45.81 percent. That’s a far cry from the “~72% of US GDP” in the above Tweet.
However, the Kobeissi Letter does have the trends correct.
Real GDP Components as Percent of GDP
Percent of GDP Key Ideas
- The PCE contribution to GDP is barely up from 61.91 percent in 1947 Q1 to 68.65 percent in 2024 Q2.
- The services contribution to GDP has increased from 24.91 percent to 45.82 percent.
- The contribution to GDP excluding PCE services and government spending has decreased from 58.53 percent to 36.71 percent.
- The Government contribution varies from a low of 15.22 percent in 1947 to a high of 25.07 percent in 1953. Government now accounts for 17.47 percent, allegedly. The only way government produces anything is by taking from others.
- Private Residential investment never amounts to much. The max was 7.32 percent in 1950. In the 2005 housing boom the high was 6.68 percent.
- Private Nonresidential is currently 13.64 percent of GDP. The high was 15.35 percent in 1981. The low was 8.95 in 1952.
Manufacturing and farming are the two major subcomponents of GDP excluding PCE services and Government.
Government Negative Contribution
This is interesting. The Congressional Budget Office projects government spending to hit 24.2 percent of GDP with revenues of 17.6 percent of GDP.
The current government contribution to GDP is only 17.47 percent, matching revenues.
Part of this is Social Security at $1,453 billion. That is an expense but does not add to GDP.
Global debt is 333 percent of GDP.
Measuring the Size of the Economy
The Khan Academy has a very good article on Measuring the Size of the Economy: Gross Domestic Product
Key Points
- The size of a nation’s economy is commonly expressed as its gross domestic product, or GDP, which measures the value of the output of all goods and services produced within the country in a year.
- GDP is measured by taking the quantities of all final goods and services produced and sold in markets, multiplying them by their current prices, and adding up the total.
- GDP can be measured either by the sum of what is purchased in the economy using the expenditures approach or by income earned on what is produced using the income approach. [GDP vs GDI – two measures of the same thing]
- The expenditures approach represents aggregate demand (the demand for all goods and services in an economy) and can be divided into consumption, investment, government spending, exports, and imports. What is produced in the economy can be divided into durable goods, nondurable goods, services, structures, and inventories.
- To avoid double counting—adding the value of output to the GDP more than once—GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production.
That last bullet point explains how these high measures for consumer spending arise.
For example, farmers grow corn and wheat, and raise chickens and cows. Milk is used to produce cheese. A baker takes flour and bakes bread and cookies.
All of the above is attributed to consumer spending in PCE goods when only the final markup at grocery stores should be attributed to the consumer. The same applies to manufactured goods.
Khan Academy Note on Social Security
It’s important to remember that a significant portion of government budgets are transfer payments—like unemployment benefits, veteran’s benefits, and Social Security payments to retirees—that are excluded from GDP because the government does not receive a new good or service in return or exchange. The only part of government spending counted in demand is government purchases of goods or services produced in the economy—for example, a new fighter jet purchased for the Air Force (federal government spending), construction of a new highway (state government spending), or building of a new school (local government spending).
What About Imports?
Repeat after me: Imports do NOT subtract from GDP although every formula says they do.
This blurb from the Khan Academy is misleading.
And finally, we must consider exports and imports when thinking about the demand for domestically produced goods in a global economy. First, we calculate spending on exports—domestically produced goods that are sold abroad. Then, we subtract spending on imports—goods produced in other countries that are purchased by residents of this country.
Imports have no impact on GDP, none, by definition.
The D in GDP stands for Domestic. Imports are not domestic but exports are. So why do we subtract imports?
We don’t really, but the formula sure looks like it.
GDP = C + I + G + (X – M) where C is Consumption, I is Investment, G is government, X is Exports and M is Imports.
The problem is we incorrectly attribute imports to domestic sales.
When you buy something on Amazon, the odds are a high percent of that is an import from China.
But we total those sales (incorrectly, generally into PCE goods) and thus need to back out those sales.
Very few people realize this and the GDP formula perpetuates the myth. Khan needs to explain this better in an otherwise excellent article.
Repeat after me: Imports have no impact on GDP, and can’t by definition. It only appears that way because we incorrectly attribute imports to domestic sales then need to subtract them.
Khan also has an error on the percent of the economy attributed to the consumer although Khan does get credit for the key idea of double counting.
Misunderstanding Spending and Services
Returning to the central theme of this post, GDP fails to correctly allocate spending on intermediate goods. And PCE ignores the fact that someone had to create those goods.
Thus the percentage attributed to consumer spending and services is overstated. Manufacturing is understated but I don’t have a specific number.
We can say services represent ~46 percent of GDP and that GDP excluding services and Government spending is ~37 percent of the economy.
We also need to emphasize the trends are not good, especially government deficit spending.
Another does of Inflation is on deck after the recession plays out.
Meanwhile, Recession Is On
The economy is cooling rapidly. The GDPNow forecast is plunging fast and there is every reason to expect that to continue.
For discussion, please see A Dramatic Two-Day Change in GDPNow Forecast, Here Are the Details
It’s amusing that a majority of economists thought there would be a recession in 2023, but with much stronger clues don’t see it now.
The discussion of imports having no impact on GDP gets things a little confused. Let me take a crack at it.
In a purely mathematical sense, trade deficits/surpluses have a net zero effect on GDP because any negative contribution from (X – M) is necessarily fully offset by a positive contribution to “I” from abroad. Remember, the balance of payments (which includes investment flows) must net to zero.
So, it’s correct that imports have no impact, but it’s because it is exactly offset by both exports and capital flows. Trade is in the equation just to identify the elements for analysis.
I have to have the least defensible thesis (no charts, no stats) but I’ve heard everyone in finance news for well over 25 years say this exact and UNCHANGING number “Consumer Spending or Services Is Two-Thirds of the Economy” and long ago became certain it must be false because it never changes. Like Bernie Madoff’s fake returns not varying at all (to make production of fake statements less of a task) or 30 years of claiming there have been an unchanging 11 million illegal aliens in the country.
According to official statistics, the World is much wealthier than it’s ever been before. The average person’s share of global real GDP was higher by 133%, or $12,500, in 2023 ($21,800) than it had been back in 1980 (at 2023 prices, $9,400).
Unfortunately (though this is seldom, if ever, mentioned), this average person’s share of the world’s aggregate debts rose by about 850%, or $46,000 – also in real terms – over that same period.
https://surplusenergyeconomics.wordpress.com/2024/08/20/287-the-mythology-of-growth/
Hey Mish,
I’m not sure why these 2/3 service estimates are far off.
From your graphs above (most recent info):
PCE (TOTAL for the consumer) = $15,733
PCE services = $10,500
That’s 66.7% (10,500/15,733) services as a percentage of Consumer purchases (the largest component of GDP)
Next biggest GDP component is Government at $4,044
The graph does not have data to distinguish between Government good and services, but I confidently guess it’s significantly more than 66% services – between all the local teachers, firefighters, police officers, state-paid contractors and nurses and doctors, federal military personnel, etc. whose pay are included within that $4,044. That would all be counted within GDP services since those workers ‘produce something’ domestically but it’s not a good you can put in your shopping cart or park in your driveway (it’s a service to the rest of us just like my own consumer purchases of a haircut or auto insurance coverage). The federal government produces few goods; local governments produce even less.
So even if the remaining (smaller) GDP categories of Investment are more goods than services, the total combined GDP is probably still close to 2/3 services
Thanks
Good Observation!!
Are state & local government spending mentioned here or just federal? At the taxation level government appears to be 40% of economy not 17-20%
The Government category here includes all three. But the 17.5% includes stuff (both goods and services) that these government bodies ‘produce’ or ‘purchase’ directly through salaries. The rest that the government collects from you/us in taxes is ‘transferred’ to others not directly providing any production to society at the moment – like Social Security. So that SS (and other transfers) don’t count towards GDP in this calculation. Only when that money is spent by the SS recipient is it counted in Consumer purchases (here PCE in Mish’s example)
i like PPP per capita to compare what a person can actually afford compared to others. who really cares what a whole nation produces. basically meaningless propaganda………having gov borrow and click mouse new currency to produce bombs for ukraine might produce jobs at raytheon and then raytheon employees can buy hookers and blow and groceries really doesn’t mean anything to me or anyone normal. i’ve been trading FX for decades.
This article shows you how complicated it is to compute. You would need incredible data aggregation to even come up with the totals. How much did they sell at Walmart, how much did they sell at Target, how many of those goods were imported? It seems like an impossible task to me.
Depends on whether that $1000 routine blood test is considered a consumer item. 🙂
1) What about finished goods that were produced by domestic or foreign mfg, or mix, paid for, shipped to car dealerships, supermarkets, retail stores, Amazon…but not sold yet. Real goods (eggs, bread, cheese…) are sold within 90 days. Other goods can sit for months/years, waiting for customers.
2) Gov spending on F-35, 155mm, sub, infrastructure, mfg… add to the GDP. When construction of mfg important to our national interest will be completed or semi completed demand for highly skilled and semi highly skilled workers will be high. Higher wages increases tax collection, filling gov coffer. If the gov is fully committed to cutting debt ==> debt in real and nominal terms will drop. The GDP will rise along with the Dow for several years.
In the 50’s the economy was dominated by manufacturing companies. In those companies most of the jobs were service jobs of one sort or the other but they were all listed under manufacturing jobs. Later on we had more and outsourcing by the manufactures of those jobs to service companies and then those jobs were listed as service jobs. Overall this trend contributed to the increase of the service industry vis a vis the manufacturing industry so much of the swing is an illusion to a certain extent.
Yep. Are Microsoft employees “manufacturer” or “service” workers? For that matter, are Amazon employees building and maintaining amazon.com “manufacturing” or “servicing”? How about people who work on ge.com or gm.com or ford.com?
One might wonder where and how to get at the underlying measurements that go in to these rather arbitrary categories.
And don’t even start on this idea of “final output”. Is that some kind of joke? Do you drive a “final output” car to work?
Mish – your explanation is not correct either. GDP is supposed to be a measure of what the economy produces but its easier to measure production in terms of consumption. In reality, consumption has been pushed up by all of the government borrowing. This should not matter if the dollar values are properly adjusted for the inflation that is caused by the increase in the money supply over the productive output of the country, but hey that is another can of worms.
Fact is GDP has been increasing faster than the production of the economy for some time.
You failed to tell me where I am wrong. Add up the components – and provide the math.
You can’t because my math adds up expect for a very tiny CIPI.
The stock sentence to remember is: “Consumption may be 70% of the economy, but production is also 100% of the economy.” – exposes the mistaken thinking.
All of the following are true:
P = C + I + G
P = 100% of GDP
C = 66% of GDP, I = 17% of GDP, G = 17% of GDP
P = 66% + 17% + 17%
Separately, ignore C I G and break down P:
P = P(services) + P(manufacturing)
Thank you for providing a detailed explanation of the contribution of personal expenditures. I guess if people consumed next to nothing then all the manufacturing in support of this consumption would go to near zero. Sort of a wartime economy.
Speaking on the topic of service, as in restaurants being the type, having had family members and myself within it for a small time, it is a totally self sustaining industry when running on all cylinders! Unfortunately it completely falls apart during tough times. With Perishable items as your main product, it is quite difficult to avoid.
It’s almost such a unique industry, that it deserves a change in the way it is handled, IMO. Hours, pay, taxes, holidays etc. all need to be more geared to the industry whims, if you wish to stop or slow down the constant fluctuations within the industry… A Cash/Tax Cow otherwise!
Two thirds of the economy is conspicuous consumption of tattoo’s, uber delivered lattes, fast food, designer jeans, hair, and nails.
Uglifying America’s women one fat thigh at a time.
Yes, but the fatter the thigh, the more tattoos that you can fit on it. Thereby adding to GDP.
The FAT THIGH to TATTOO RATIO. This must be ADDED TO GDP along with the amount of Water that can be contained in fat belly’s Belly Buttons..
The Belly Button ratio can be used to determine the new SUGAR CONSUMPTION RATIOS along with the Potato Chip Convenience Consumption Meter.
LOL! The hair and nails benefits the chinese economy
and I always thought it was the Koreans (or so my wife tells me!)
don’t forget pets, dogs and cats are big now with american females, they would rather have a dog than a child
I don’t know if they are that _ucked up or we American males are that _ucked up
We spend a $120 billion a year on pets and yet everyone complains that they can’t make ends meet.
I name all of my dogs “ENDS”. When things get too tough, I have a grinder that I can use to make ends meat.
^^^ CLEVER THAT!
Try $260 billion/yr of direct and indirect expenditures.
It’s the men’s “keep it in your pants” coalition. WHAT MAN wants to be tied down to a Baby Mama’s constant harassment’s in coordination with Baby Mama’s MAMAs. The yelling alone would drive a man to drink and continuing doing street drugs. ABSENTEE DADDYS!
amerikan males are majority little boys that never grow up. past 3 generations. i think the ww2 vet generation the last majority males with some sense of manhood. the rest mostly 3rd base wimpss………… no wonder the females have moved onto themselves and pets………..
also in some towns i’ve lived like mexican hoods in phoenix, and all sorts of immigrant hoods here in brooklyn much of economy goes unreported. the pool cleaning, tree trimming, construcition, cleaning and much food is all cash……….not to mention the sex and drugs and rock and roll trades………..
This excellent article helps us understand GDP & how they are calculated. There is one minor error — it is “Khan Academy”, not “Kahn Academy.”
Thanks!
Will correct.
A somewhat confusing explanation of national income accounting. GDP can be measured from the production side, the expenditure side, or the income side. An input-output table would quickly reveal how the 3 sides of the national accounts are related.
exactly. i’ve seen the flow charts that explain what mish tried to explain…….one flow chart makes it easy to comprehend…………
You pointed out: Since COVID, it has increased by $55 TRILLION
Nuff said, give ANY Reason, for the Government to Spend Our Taxpayers $$ and they will happily Spend Away!!!
No explanations needed beyond that Fact!
How to stop it?
Stop Allowing the Government to Steal from Us! Hold them accountable through Elections. Stop listening to the MSM. Start Saving and stop spending so much of your $$.
Or exchange all your fiat for metallic money ie Gold and Silver before it’s too late
BC is the only true answer at the moment, as any other form of currency can be confiscated by Uncle Sam…
Nonsense Bitcoin IS CIA
Bitcoin is easily confiscated in many ways
Yes, being arrested mid-bitcoin is a powerful preventative tool.
Mish, I may well be wrong in my assumption, but if I pay cash for a BC, and hold it, then nobody know that I own it, and therefore cannot tax or confiscate it, as they can with Gold or Silver for example.
Now if I try to sell it in the US, I will be taxed much like RE or Stocks via Capital Gains, I agree.
If I use it in another Country however, that accepts BC as tender, then I would not be taxed on it by the US either I don’t believe. So it can be taxed at some point, under certain circumstances up to you, and not simply confiscated.
As far as making it useless via transaction bans, I don’t see how that could or would work. There are Billions floating out in the World.
An underground economy would arise, more foreign countries would climb onboard and happily take it, as would certain investors. BC can’t simply disappear and its value alongside with it can it? Wouldn’t that be like the $Dollar, tomorrow being valued at zero?As long as it can be traded, it has value. Where and how much depends yes I agree.
We’re in an everything bubble, silver doesn’t seem too overvalued but I think gold will sell off once the real estate and stock bubble pops so people can get the cash to buy those things for fair/good prices.
Elections do *nothing*! Both the DNC and RNC are captured, and those organizations pre-screen who can appear on the ballot.
Agreed about the Republican and Democrat Uniparty but that’s why people need to get educated and vote libertarian, as long as the libertarians vote against debt and debasing, that is.
Can’t agree with that in principle, however it may appear like that on the surface. Trump would never be on the Ticket, ever, if that were the case. Neither would have many, many other candidates.
Do the Parties (both) have leaders, and party paths carved out, and minimum objectives, that must be on display, or they lose the Party Funds to campaign to a degree, absolutely, as we see with Trump, and Harris this election.
Trump is not loved by His Party, but surely the most electable, so He is on the ticket. Harris is not even liked by Her Party, but she has sole Party access to 1/2 Billion, and she is Black & a Woman, so she gets the nod in her party.
So in this case Trump is picked because He is Electable, and Harris is picked for $ and Color. Gee I wonder who will Win This Election…