So the more I thought about it the more I think confusion with “what is investment” might actually be more rooted in what is consumption?

I suspect there is a tendency to equate consumption with things you go buy from the store. Nothing could be further from the truth. Well, actually lots of things could be further from the truth, 2 + 2 = 5, for example. And, really to be honest there is actually some truth to the idea that consumption is stuff you buy from the store. But, its not the whole truth by gosh and that’s what we are here to dig up!

So here are some major categories of personal consumption expenditures.

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If you can’t see that blue line is housing. The first yellow line is health care services. The light green line is financial products and insurance. Notice, how we have yet to hit anything that you buy in the store.

The burnt orange line is food services and accommodations. There we go, that’s something we buy. Though look its actually smaller than financial services. Then comes motor vehicles in silver. That’s probably the biggest consumption purchase most people make but its not much above the next category in light blue pharmaceuticals.

In light yellow is furnishings and rounding out the bunch is education.

There are plenty of other things but these are the big fish. See how few of them are things that are bought in the store? Indeed, the second largest – housing – is mostly imputed.

That is, no one actually buys anything. Imputed housing consumption is what you would have had to pay yourself in rent but didn’t because you own the place you are living in.

Financial services is also imputed. It’s the difference between the risk free rate of interest and the rate of interest that banks charge on loans. Basically it’s the spread that financial institutions get.

Why is that consumption?

Because there is no other economic way of making sense of it. If someone wasn’t producing a “service” then no one could be making money in this market. However, people are making money hand over fist. So they must be producing something. What that is, we can’t measure but we can take the difference between the money the receive in and the money they pay out and that gives us how much service that industry is adding to the economy.

Now that you see this you can more easily understand the following chart

FRED Graph

How is it that personal consumption expenditures barely dipped and then recovered while retail sales got hammered and have yet to recover.

Its because housing services, health care services and financial services, the three largest components of PCE, are largely unaffected by the choice of consumers to spend or not. Indeed, two of them are not even market transactions at all. On the other hand retail sales are sharply affected by consumer choices.

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