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Consumer Spending Doesn’t Drive the Economy

“Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries.”

–“Consumers Give Boost to Economy,”  New York Times, May 1

Every quarter, when the government releases its latest GDP figures, we hear the familiar refrain:

“What the consumer does is vital for economic growth.”

“If the consumer starts saving and stops spending, we’re in big trouble.”

“Consumer spending accounts for 70 percent of the economy.”

The latter “fact” is repeated regularly in the news reports from the Associated Press, the Wall Street Journal, and the New York Times.

The truth is that consumer spending does not account for 70 percent of economic activity and is not the mainstay of the U. S. economy.   Investment is!   Business spending on capital goods, new technology, entrepreneurship, and productivity are more significant than consumer spending in sustaining the  economy and a higher standard of living.  In the business cycle, production and investment lead the economy into and out a recession; retail demand is the most stable component of economic activity.

Granted, personal consumption expenditures represent 70 percent of gross domestic product, but journalists should know from Econ 101 that GDP only measures the value of final output.  It deliberately leaves out a big chunk of the economy — intermediate production or goods-in-process at the commodity, manufacturing, and wholesale stages — to avoid double counting.  I calculated total spending (sales or receipts) in the economy at all stages to be more than double GDP (using gross business receipts compiled annually by the IRS).  By this measure — which I have dubbed gross domestic expenditures, or GDE — consumption represents only about 30 percent of the economy, while business investment (including intermediate output) represents over 50 percent.

Thus the truth is just the opposite:  Consumer spending is the effect, not the cause, of a productive healthy economy.

The Importance of Say’s Law

This truth prevails in the marketplace:  It’s supply — not demand — that drives the economy.  Savings, productivity, and technological advances are the keys to economic growth.  This principle was discovered and developed by the brilliant French economist Jean-Baptiste Say in the early nineteenth century and is known as Say’s law.  In fact, he invented the word “entrepreneur” to describe the primary catalyst of economic performance.

Is retail sales a leading economic indicator?  Each month the Conference Board releases its Leading Economic Indicators for the United States and nine other countries.  The ten U.S. leading indicators are:

• manufacturers’ new orders


• building permits


• unemployment claims


• average week…

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