I have said before that I like retail and food service sales as a proxy for consumer demand because this is actual spending that folks are plunking down on a month by month basis. In Personal Consumption Expenditures on the other hand include things like financial services, owners equivalent rent and health care paid by third parties.

These are not things that consumers are actually “buying” or perhaps to put it another way, there is no cash-in-advance constraint on these services.

Over the last thirty years or so retail sales as a fraction of disposable personal income were constant. However, the personal savings rate has been in decline.

So, what exactly makes the difference. It looks like its all health care and much of it can be explained simply by looking at Medicare and Medicaid.

The red line is the personal savings rate. The blue is the personal savings rate calculating by extracting Medicare and Medicaid from Personal Outlays.

FRED Graph

Now I haven’t thought carefully about Medicare contributions through payroll tax but I don’t think it can change the picture dramatically.

I think there is a similar phenomenon going on with employer contributions for health care but I don’t have the data to manipulate handy.