Personal Consumption Expenditure

Consumer spending makes up a big part of the U.S. economy. An estimated two-thirds of it, to be exact. Tracking consumer spending is key to tracking the overall economy. The personal consumption expenditure is the formal way to measure consumer spending.

Okay, so first: consumer spending.

You work at Smushy Love, a company that makes heart-shaped pillows. People buy the pillows...for birthdays and Valentine’s Day, and as a reward for getting their annual cardiovascular checkups. Stuff like that. The money spent on the pillows pays your salary. Customers pay Smushy Love for the pillows. Smushy Love gives some of that money to you in your paycheck. Then your paycheck allows you to buy a host of other consumer goods. You buy food and gas and clothes and electronic toothbrushes and Christmas Tree-shaped pillows...for holiday gifts and/or for Arbor Day decorations. Some of the money you spend on this stuff eventually goes to workers at the companies that make the products. These workers then spend the cash on other stuff. And so on. It’s the economic circle of life. That consumer spending cycle is what represents 2/3 of the economy. Something like $9 trillion dollars a year.

So the spending on consumer goods is crucial. Economists and policy makers need a way to track all that spending. It allows them to see how things are going, and to make predictions about overall economic growth.

Enter personal consumption expenditure.

It’s the fancy name for all that money you spend on knick-knacks and doo-dads. And services, too; consumer spending includes stuff like like oil changes and doctor visits and back hair electrolysis. Personal Consumption Expenditure, or PCE, is the official stat for measuring consumer spending in the economy. In the U.S., the figure is compiled monthly by the Department of Commerce.

The same report also includes details on personal income and disposable personal income, two measures of how much money people make. The government looks at how much Smushy Love is paying you, and how much of that money you're spending. PCE also helps to track changes in prices.

Along with the income and spending data, the government issues what's called the PCE price index. It shows how much prices for consumer goods have changed during the period. The index measures retail inflation. Or deflation, if prices are going down.

Smushy Love overproduced heart pillows ahead of Valentine's Day. Now it's March, and they've got a warehouse full of them. They drop prices to move out the inventory. That drop in prices would show up in the PCE price index.

Smushy Love is now facing lower revenue. They cut your salary. Which shows up in the government report, in the personal income section. Now you have less money to buy other goods. You spend less on clothes and back hair electrolysis. That lower spending shows up in the PCE statistic.

Now to find someone to tweeze your back hair.