Saturday, October 30, 2010

You can tell good lies with bad definitions

The government's Bureau of Economic Analysis issued a report this week touting the improving economy with a measure of Personal Consumption Expenditures (PCE) -- up 2.6%.

That would lead one to believe that the consumer is spending again, despite high unemployment, and much uncertainty over future prospects even for those still employed.

A few little details bring the PCE into clearer focus. We are often told that consumer spending is 70% of the Gross Domestic Product. It's like a mantra. I hear it everywhere. What I did not know until yesterday is that PCE includes $2.5 trillion of health care spending, half of which is financed by government! When the government writes a check for your grandma's knee replacement, that get's counted as consumer spending in the government's GDP statistics, we are told by Bloomberg's Michael Mandel.

The kind of spending most normal people (i.e. non-economists) consider consumer spending consists of buying "stuff," not getting prescription drugs, visiting doctors, or having operations.

So how is the real economy doing? How are consumer expenditures -- by a normal definition -- holding up? "...state sales tax revenue (the only valid measure of consumer sales), is still far below 2007 levels and states are in serious trouble over it," according to Mike Shedlock (aka "Mish").

Yet by including government-funded health care and other health care spending, we see a chart for "personal expenditures" that looks like this, indicating a recovery. Click image for full size.

Wow. That looks like a major recovery to pre-recession levels. But a good percentage of it is inflation-fueled health care, some of it paid with borrowed money from the federal government.

As for the economic growth on Main Street... not so much.