More on Consumption Spending, GDP, and Inequality

On the Marginal Revolution blog (on August 4), Tyler Cowen posted a   link to a twitter feed, with this header:

2. Consumption as a percentage of gdp has increased with inequality (ahem).

The link shows personal consumption expenditures as a percent of GDP and a measure of income inequality (the Gini coefficient) from 1978.  Both PCE as a percent of GDP and the Gini coefficient have been rising—consumption has become a larger percentage of total spending in the US and inequality has been increasing.  Cowen’s “ahem” is, I suppose, an indication that we should be surprised that both of these have happened at the same time.

Leaving aside the issue I raised yesterday there is also the issue of what, exactly, has been happening to consumption, if we disaggregate households by income.  Fortunately, we can do this, using data from the Consumer Expenditure Survey.*  The CES presents measures of after-tax income and household spending by quintiles—the 20% of households with the lowest incomes, and so on.  (Which means each group has the same number of households in it).  So we can look at what has happened both to household (after-tax) income and to household consumption spending.  And the results are interesting.

	1984	2011	% Change, 1984-2011
Q1 Income Q2 Income Q3 Income Q4 Income Q5 Income	$6,792 $21,111 $36,952 $56,911 $107,969	$9,805 $27,117 $46,190 $74,019 $161,292	+44.4% +28.5% +25.0% +30.1% +49.4%
Q1 Spending Q2 Spending Q3 Spending Q4 Spending Q5 Spending	$22,944 $31,039 $42,150 $56,588 $90,550	$22,001 $32,092 $42,403 $57,460 $94,551	-4.1% +3.4% +0.6^ +1.5% ++4.4%

Q refers to the income quintile, from lowest to highest.  The values have been
adjusted using the CPI, with 2011 used as the base year.  Spending can exceed
income when households receive transfer payments or use their savings to
pay for part of their spending.  Transfer payment receipts are the obvious
source of funds in Q1 and Q2.

Overall, income increased by about 39%...but spending increased only by 3.8%.  While about 60% of the total income increase went to the highest income quintile, more than 75% of the increase in consumer spending occurred in the highest-income households.  It’s worth noting that consumption spending actually fell in real terms in the lowest income quintile.

What this tells us is quite simple.  It’s possible for consumption spending to rise as a percentage of GDP and for income inequality to increase at the same time.  All that’s required is for the bulk of the consumption spending to occur in high income households.  And—that is exactly what happened.