Consumer Driven Economy

August 23, 2013 | Jesus Jimenez, Principal

This week’s Chart of the Week examines the importance of personal consumer expenditures (PCE) on the U.S. economy. From 1970 to 1st quarter 2013, PCE has grown from 60% to 69% of GDP as the health of the economy has become more dependent on consumers. While many factors can account for the PCE figure, one of the more telling data points is the personal savings rate: if consumers are spending more, they must naturally be saving less. Not surprisingly, the personal savings rate has declined from 12.3% in 1970, indicating a trend of consumers saving less and spending more. Savings rates hit all time lows leading up to the recent recession as consumers spent outside of their means in an overheated economy. In reaction to the economic downturn, consumers became conservative and increased their savings, applying further negative pressure to an already troubled economy. Currently the savings rate has trended back down, a sign that fear has subsided and investors are spending more. This coupled with favorable trends in housing and consumer confidence are positive indicators for future economic growth.