How Much Power Is in Your Wallet?

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By Ashley M. Heher, AP Retail Writer

There's power in our pocketbooks. But how much?

In the U.S., consumer spending — the amount of money we shell out on everything from hammers to homes — fuels our economy. At the end of the federal second quarter in late March, the government said "personal consumption expenditures" climbed to almost 70.7% of the nation's gross domestic product, a term for the value of everything produced by labor, plants and properties in the U.S.

Not everyone agrees with that figure, though. Some economists say defining consumer spending as the engine behind more than two-thirds of the U.S. economy is misleading math; they say government spending and other items should be factored out.

Here are some questions and answers about consumer spending and its impact the economy.

Q: What is consumer spending?

A: Personal consumption spending — what's commonly called consumer spending — is the dollar value of what's bought every day. It's on pace this year to be just short of $10 trillion.

Federal economists separate the data into dozens of categories, tracking spending on everything from tires and televisions to flowers, fuel and amusement park admission fees. But the figure also includes services like health care and insurance, along with rent and mortgage payments and even checking account fees.

Q: Why don't some people agree that consumer spending is 70% of the economy?

A: Critics note that the official consumer spending figure includes things that aren't paid out of our own pockets.

The biggest area of debate is health care spending, which in 2008 reached $1.56 trillion, according to the Bureau of Economic Analysis. That figure includes federal and state government spending on programs like Medicaid and Medicare.

Another federal agency — the Centers for Medicare & Medicaid Services — does its own analysis of the nation's health care spending, which it says was about $1.88 trillion in 2007, the last year for which they have data available. By CMS estimates, roughly 14% of medical costs were paid out of pocket in 2007 while nearly half was paid with public money from local, state and federal coffers. Much of the remainder is picked up by private health insurers and other private money.

Some economists argue that only the part of health care costs paid out of Americans' pockets should count as consumer spending.

The same argument can be made for much smaller categories of personal spending that are supplemented by federal money, such as subsidized school lunch programs or military uniforms. Both figures are included in the overall consumer spending number.

Subtract the public money from the nation's personal spending figure and you can see how the 70% gets whittled away, category by category.

Q: If 70% is too high, what's an accurate figure?

A: Among the vocal dissenters is Business Week Chief Economist Michael Mandel. In an August blog posting, he argued that personal consumption spending as most people understand it — the money everyday people spend on everyday items — accounts for just 40% of the nation's economic activity.

Federal economists say there's no official figure detailing what consumer spending would be after stripping out government money. And experts say there could be any number of figures to define what consumers' actual spending is based on how different variables are measured. (If your taxes supplement a police department purchase of a new squad car, does it count as "consumer spending" or not?)

Q: So why do others agree with the government's version of the math?

A: Think of it this way: Whether you pay for a checkup out of your own pocket, through Medicaid, or with private insurance, your physician's still getting paid for checking your blood pressure and listening to your heart.

In essence, everyday actions and events — even the ones that we don't directly pay for — can start an economic domino effect that winds up contributing to GDP.

Without a doctor's visit, no service would have been provided. Without a service, no payment would have been received.

"There is logic to the government's accounting," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "And if you accept that logic, then the government is right."

Q: Is consumer spending as big a deal in other countries?

A: According to data from research firm Euromonitor International, the U.S. was ranked seventh in per-person consumer spending in 2008. America was behind wealthy nations and investment-friendly countries like Liechtenstein, Bermuda, Luxembourg and Switzerland.

As a percentage of GDP, consumer spending in the U.S. is the highest of the nation's 20 major economies, according to Euromonitor's figures.

Spending as a percent of GDP is higher in many third-world nations than in the U.S., and in some cases spending even exceeds GDP. That's often because many of those developing economies are supported in large part by international aid — which quickly gets spent — and because they have very little industry, leaving them with rather small GDPs.

Q: If cash registers don't drive other economies, what does?

A: University of Maryland economic and business professor Peter Morici says economic engines can be divided into two areas: consumption and exports.

While the U.S. economy is overwhelmingly driven by the consumption of goods, the economy in nations like China and Saudi Arabia is fueled by goods that are exported to other countries.

In China, a manufacturing hotbed for everything from clothes to computers, consumer spending accounts for about a third of the gross domestic product. In oil-rich Saudi Arabia, it's slightly more than a quarter.

Meanwhile, in many of the largest industrialized countries — like Germany, France, Italy and Britain — government spending makes up a much larger share of the total economy.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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