Consumer spending data is misleading for Canada

With Canada's GST and HST, Economist Michael Mandel's article Consumer Spending is *Not* 70% of GDP may not completely apply. Mandel does go through why shopping is not the be-all and end-all, he also explains the apparent discrepancy between retail sales and consumer spending. Let's take a look.

I opened up this morning’s NYT and see the big headline “Retailers See Slowing Sales in a Key Season.” And I just know that we are about to have another round of “consumer spending is 70% of gross domestic product, so blah blah blah blah of course we can’t recover unless consumers start spending again.” (Not in the NYT story, to their credit, but you can find similar quotes everywhere you look).

Blah blah indeed. As a textbook author, there are few things that frost me more than hearing “consumer spending is 70% of gross domestic product,” because it perpetuates two very large and very misleading untruths.

First, the category of “personal consumption expenditures” includes pretty much all of the $2.5 trillion healthcare spending, including the roughly half which comes via government. When Medicare writes a check for your mom’s knee replacement, that gets counted as consumer spending in the GDP stats.

At a time when we are wrangling over health care reform, it’s misleading to say that “consumer spending is 70% of GDP”, when what we really mean is that “consumer spending plus government health care spending is 70% of GDP.”

Second, an awful lot of those back-to-school dollars are going to imported clothing and school supplies (how many of those laptops and iPods do you think are made in the U.S.?). A dollar of consumer spending does not translate into a dollar of domestic production.

In fact, the whole way that the BEA presents the GDP statistics points the public debate in the wrong direction. GDP stands for “gross domestic product”—that is, domestic production. But the breakdown of GDP is into expenditures categories—personal consumption expenditures, government consumption expenditures, etc.

I think we need to move towards presenting GDP in terms of production, rather than spending. We need a shift from the consumer to the producer as our main unit of analysis.

But for now, we need to stop being so darned obsessed with consumer spending.