What Is Personal Consumption Expenditures (PCE)?
Personal consumption expenditures (PCE), also known as consumer spending, is a measure of the spending on goods and services by people of the United States. According to the Bureau of Economic Analysis (BEA), a U.S. government agency, PCE accounts for about two-thirds of domestic spending and is a significant driver of gross domestic product (GDP).
An estimated total for PCE is compiled by the BEA to measure and track changes in spending on consumer goods over time. This figure can provide an idea of economic strength and how price changes can affect spending.
Personal spending and income statistics are released monthly in the BEA Personal Income and Outlays report. The report also includes the latest calculation for the Personal Consumption Expenditures Price Index (PCEPI), which measures price changes and provides a view of inflation.
- The term personal consumption expenditures refers to a measure of consumer spending.
- PCE is constructed and reported by the Bureau of Economic Analysis, along with personal income and the PCE Price Index in the Personal Income and Outlays report.
- PCE includes how much is spent on goods (durable and non-durable) and services.
- The PCEPI is the method used by the Federal Reserve to measure inflation.
- The PCE figures can affect decisions about business offerings, hiring, and investments.
Personal Consumption Expenditures
Understanding Personal Consumption Expenditures
Consumer spending is an important factor that drives the U.S. economy and is a key part of GDP. That's why it is considered a leading economic indicator. PCE sheds a light on buying habits and savings levels.
Economists and analysts use PCE to make projections about future spending and economic growth. It gives companies insight into their business needs concerning products and services and can affect hiring and investing. The BEA uses consumer spending to calculate its inflation gauge, the PCE Price Index, which is why measuring and tracking PCE is important.
Personal consumption expenditures have been reported by the BEA since 2012 in both current dollars and chained dollars. PCE is one of the three parts of the BEA's monthly Personal Income and Outlays report:
- Personal income shows how much money consumers earn
- Disposable personal income represents income available after taxes are paid
- Personal consumption expenditures are called outlays or consumer spending
The PCE Price Index
In addition to reporting the three measurements above, the Personal Income and Outlays report includes the PCE Price Index figures. The PCEPI measures the prices consumers pay for goods and services, as well as changes in those prices. It is considered a gauge of inflation in the U.S. economy.
The PCE Price Index is calculated using PCE data. It may indicate whether prices are inflating or deflating, and how consumer spending behavior changes in response. The PCEPI provides two figures:
- One is derived from all spending categories for PCE
- The second excludes data for food and energy and is known as the core PCE price index
The core PCEPI can make an underlying inflation trend more visible. That's because food and energy prices can obscure it due to their more frequent volatility, as compared to other prices.
Tracking the PCE Price Index
The BEA uses the current dollar value of PCE to calculate the PCE Price Index. As mentioned, PCEPI shows price inflation or deflation that occurs from one period to the next. Like most price indexes, the PCEPI must incorporate a deflator (the PCE deflator) and real values in order to determine the amount of periodic price change.
Both the PCE Price Index and the Core PCE Price Index (which, again, excludes prices for food and energy) show how much prices change from one period to another. Breakdowns of the PCEPI show price inflation/deflation by category as well.
Fed Preference for the PCE Price Index
In 2012, the PCE Price Index became the primary inflation index used by the U.S. Federal Reserve when making monetary policy decisions. The Fed prefers the PCEPI over the comparable Consumer Price Index (CPI), because, in summary:
- The PCEPI better reflects changes to consumer spending, such as selecting substitute goods due to price changes
- It covers a broader range of spending
- Past information can be adjusted to support recent information
The PCEPI is also weighted by data acquired through business surveys, which tend to be more reliable than the consumer surveys used by the CPI. PCEPI also uses a formula that allows for changes in consumer behavior and changes that occur in the short term.
These factors result in a more comprehensive measure of inflation. The Fed depends on the nuances that the PCEPI reveals because even minimal inflation can be considered an indicator of a growing economy.
Other measures of inflation tracked by economists include the Producer Price Index (PPI), and the Gross Domestic Product (GDP) Price Index.
Personal consumption expenditures and the PCE Price Index are two different measurements. PCE measures consumer spending on goods and services while the PCEPI measures the prices of those goods and services. The figures for both are calculated by the Bureau of Economic Analysis.
How Personal Consumption Expenditures Are Measured
The BEA reports the total value of personal consumption expenditures collectively every month. Like most economic breakdowns, PCE is split between consumer goods and services. The consumer goods figure is broken down by durable goods and nondurable goods.
Durable goods are items that last longer than three years. Examples include cars, electronics, appliances, and furniture. Non-durable goods have a life expectancy of under three years. These include products like cosmetics, gasoline, and clothing. Services are tasks performed for the benefit of the recipient. Examples of services are legal advice, house cleaning, and plumbing.
Specifically, the categories represented in PCE data include the following:
- Durable Goods: Motor vehicles and parts, furnishings and durable household equipment, recreational goods and vehicles, and other durable goods
- Nondurable Goods: Food and beverages purchased for off-premises consumption, clothing and footwear, gasoline and other energy goods, and other nondurable goods
- Services: Housing and utilities, health care, transportation services, recreation services, food services and accommodations, financial services and insurance, and other services
BEA measures consumer spending for the nation as a whole and as broken down by state and the District of Columbia. While it issues the aforementioned monthly report, additional details are provided annually.
According to the BEA, the majority of PCE (valued by market prices, including sales tax) comes from household purchases of new goods and services from private businesses. It also includes household purchases of new goods and services from the government.
Further, PCE also consists of spending by nonprofit institutions to provide services to households, household purchases of used goods, and the purchases of goods and services by U.S. residents in foreign countries.
PCE also includes spending on behalf of households by third parties, such as employer-paid health insurance and medical care financed through government programs, life insurance expenses, and pension plan expenses.
Advantages and Disadvantages of Personal Consumption Expenditures (PCE)
Personal consumption expenditures data provide a view of how the economy is faring. This information is important for economic policy purposes and business decision-making.
When people spend without hesitation, it usually means that the economy is doing well. When they cut back on spending, it points to problems in the overall economic picture.
PCE estimates aggregate spending for a large number of commodities. This can provide a view of spending that accounts for more goods and services actually purchased.
PCE data may reflect measurement errors that occur during collection and in source data provided to the BEA.
It may also reflect classification errors (after collection) to the personal sector and other sectors comprising the national accounts. (PCE is part of the National Income and Product Accounts constructed by the BEA.)
Prior PCE figures are subject to revision every year. That can result in different measurements over extended periods. Some observers feel that this reflects the inability to actually value personal consumption expenditures.
Provides a view of how the economy is faring
Reports aggregate spending on a broad range of goods and services
Changes in spending can indicate a growing economy or economic difficulties for households
May reflect data collection errors
May reflect data classification errors after collection
Figures are estimates and can be revised, which can change results over time
Example of Personal Consumption Expenditures (PCE)
The table below illustrates how PCE data are used to show changes in personal spending from month to month in various categories. For example, the total PCE in December 2022 was $17.74 billion. This represents a drop in spending of about 3.8% in spending compared to November.
Note that spending on durable goods motor vehicles and parts dropped from November to December. The table also shows the inflation gauge PCE Price Index, which is included with consumer spending and income amounts in the monthly Personal Income and Outlays Report.
The PCE% changes are rounded and will not produce the exact dollar amount shown.
|Month||October (2022)||November (2022)||December (2022)|
|PCE (in millions of seasonally adjusted dollars)||$17,788,621||$17,761,406||$17,738,173|
|PCE % chg (from prev month)||N/A||-0.15%||-0.13%|
|Motor vehicles & parts PCE||$754,615||$712,167||$685,130|
|PCEPI % chg (from prev month)||N/A||-5.62%||-3.8%|
Source: Bureau of Economic Analysis
What Is the Importance of the Personal Consumption Expenditures Number?
The personal consumption expenditures number shows how Americans collectively spend their money. Tracked from month to month, it is an indicator of the health of the economy overall. It also is a key component of the PCE Price Index, which tracks inflation or deflation in consumer prices over time.
PCE Price Index vs. Consumer Price Index: What's the Difference?
The CPI is compiled monthly by the Bureau of Labor Statistics based on a survey of urban households. It measures the price of a basket of household goods and services that most people buy regularly. Its movements from month to month show whether the prices paid by consumers are going up or down, and by how much.
The PCE, produced monthly by the Bureau of Economic Analysis, also records changes in the prices of a basket of goods from month to month. It is broader in scope. It factors in price changes in the entire output of the economy as well as changes in out-of-pocket costs to consumers.
What Does the PCE Data Show Us?
The PCE data for the one-year period ending January 2023 showed a steady rise in personal consumption expenditures to about $18.05 billion from approximately $17.74 billion reported in December 2022. Those numbers contributed to an overall PCE inflation rate of 5.4% for the 12-month period ending January 2023.
The Bottom Line
Personal consumption expenditures, or PCE, allows economists, individuals, and businesses to see how well the economy is faring from month to month.
PCE is a measure of how consumers spend their money and whether they save, rather than spend. It also shows how people change their buying habits when prices change. This provides a window into demand for products and services which can help the decision-making process of businesses and the government.
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