It is common to hear that consumption contributes 65 to 70% of total GDP, hence its importance to economic growth. More insightful, though, is to understand the underlying components of consumption and how accurately it truly reflects consumption on behalf of consumers. To do this, we use the Personal Consumption Expenditures (PCE) data which is the source of that 65 – 70% number. Critically, one must understand the elements of PCE data: in addition to the traditional consumption items (clothing, electronics, food and drink, housing, transportation, etc.), non-profit spending and expenditures made “on behalf” of consumers, such as Medicare and Medicaid, are also included. While traditional “active” consumer spending undoubtedly makes up a large percentage of G.D.P., increased spending on health care (through Medicare and Medicaid) over time has likely overstated this popular statistic.

Indeed, this is reflected in the historical data: in 1959, over 73% of consumer spending was spent in four main traditional consumer spending categories: housing, transportation, food and drink, and personal care/clothing. Over the last 50 years, the percentage spent on these four categories decreased to just over 50% of all spending in 2011. The biggest reason for the change is increased spending on healthcare – it accounted for less than 6% of overall PCE in 1959, while today it accounts for nearly 20%. This massive increase has certainly decreased the percentage of total PCE that is attributable to traditional, active consumer spending choices.

PCE is not a great indicator of average consumer expenditures, because the “spending” on Medicare and Medicaid is not distributed evenly among consumers, nor is it an “elected” expenditure in that consumers freely choose to spend or not spend on the two items. So if consumers aren’t actually spending 20% of their expenditures on healthcare, what are they buying? To get a sense for what consumers are actually spending their money on, the Bureau of Labor Statistics performs a survey called the Consumer Expenditure Survey that attempts to collect data on the spending habits of American consumers. Based on these results, healthcare accounts for less than 7% of annual spending for the average consumer.

This week’s Chart of the Week examines four types of loans and their delinquency rates over the past twenty years. A loan is considered to be delinquent if it is past due by thirty or more days. The delinquency rate is the percentage of loans that are considered to be delinquent.

The chart shows all four delinquency rates are on a noticeable decline from their peaks as the economy has made some improvements over the last two years. In fact, three of the four rates have fallen below their respective twenty year averages. Business loan delinquency rates have followed the pattern of the business cycle therefore it is not surprising to see the rates go down as we emerge from recession. Consumer and credit card delinquency rate declines are due in large part to commercial banks writing off bad debt, a tightening of lending standards, and consumers deleveraging. More individuals are no longer paying their mortgages, thus freeing up money to pay off other debts.

The delinquency rate for single family mortgages remains considerably higher than its twenty year average. Many homes are now valued significantly lower than their loan balances. This fact, coupled with a challenging job market, has contributed to the high delinquency rate. The potential that these delinquent properties will eventually end up in foreclosure make it an even more challenging environment for residential real estate. Foreclosures will increase the supply in an already oversupplied market and exacerbate the downward pressure on home prices. As discussed in our 2012 Market Preview, this environment has led to a boom for owners of rental units: the apartment sector has benefitted because individuals are now turning to rentals rather than purchasing homes.

In the most recent November employment survey, the unemployment rate fell significantly further than expected, to 8.6%. This seeming improvement, however, masks continued weakness in economic growth. Calls for a U.S. recession now seem premature, but, so too do calls for a return to robust growth. In November, the economy added an estimated 120,000 jobs. This is roughly the number of jobs that must be added each month to simply keep pace with population growth. Thus, the majority of the improvement in the unemployment rate came from a decline in labor force participation, shown in the Labor Force Participation chart.

The labor force participation rate measures the number of people who are employed or seeking employment as a percentage of the total population. Notably, the participation rate has increased over time as more women have joined the workforce. Currently, the labor participation is at the same level as during the double dip recession of the 1980’s. Improvements in the unemployment rate due to a decline in the participation rate imply little relative improvement in a country’s economic condition. Ultimately, either participation stays low, which permanently lowers output potential, or participation increases as the economy improves, which increases the unemployment rate.

Due to the long duration of unemployment after the most recent recession, more workers may continue to drop out of the labor force. This makes the unemployment rate a less relevant measure of the output gap between the economy’s current and potential output. Ideally, for robust growth to take hold, the number of jobs created would have to be in excess of those needed to keep up with population growth. In this scenario, there may or may not be a decrease in the unemployment rate, depending on how the participation rate changes. However, there would be an improvement in the employment to population ratio. This measure, in the Employment to Population Ratio chart, has languished at depressed levels since collapsing during the most recent recession.

This week’s chart analyzes job growth after the last four recessions by examining employment levels 60 months after the start of each recession. The data focuses on private employment, not government employment. Ellipses on the chart represent the end point of each recession, whereas squares represent the beginning of job growth.

The 1982 recession lasted seventeen months. After its cessation, it took only nine months for employee growth to emerge. While the 1990 recession lasted nine months, it endured an additional 26 until job growth began. The length of the 2001 recession was again brief lasting only nine months, but it withstood 30 months until growth mode. The most recent recession began in December of 2007 and lasted nineteen months. At 27 months and counting, we are still waiting for job growth to commence.

Five years after the ’82, ’90, and the ’01 recessions, private sector job levels were well ahead of their pre-recessions levels. Unfortunately, it is difficult to paint a happy picture on the current status of employment: while there has been progress in recovering lost jobs, substantial headwinds remain, as 6.3 million more jobs are needed to return to pre-recession levels.

This chart looks at the drop and recovery in real personal income during recessions over the last 50 years (personal income is shown as a percentage of the previous peak to look at prior recessions on an apples-to-apples basis). The red line (Real Personal Income less Current Transfer Receipts) shows inflation adjusted after-tax disposable income not including government support (i.e. net social security receipts, unemployment insurance, etc.). The gray line (Real Disposable Income) shows inflation adjusted after-tax disposable income including government support.

A few things stand out. First is the depth of the 2008 – 2010 recession, which was far worse than any prior drop in U.S. incomes. Second, this chart shows the role of government support during recessions, as the drop in real disposable income is far less than would otherwise be expected, due to government support. Thirdly, the drop in real disposable incomes over the last three months is a worrying trend. This is especially true given the growing talk in Washington over reducing government support of disposable income through higher taxes and/or lower spending.

Falling real incomes and less government support does not bode well for U.S. economic growth over the coming quarters.