The U.S. Bureau of Economic Analysis (BEA) released its third estimate of the nation’s economy for the second quarter of 2017. According to the release, faster economic growth was maintained over the second quarter. The nation’s economy, measured by real gross domestic product (GDP), rose by 3.1 percent over the April to June period. This rate of growth exceeds the 1.2 percent pace recorded in the first quarter of 2017 and is the highest of the three second quarter growth estimates.
The figure above tracks the changes in GDP growth estimates for the second quarter of 2017. It illustrates both that personal consumption expenditures was the largest contributor to overall growth in the second quarter and that growth in the second quarter progressively improved with each estimate. The change between the second and third estimates were minor, reflecting a combination of a slight decline in the contribution from PCE, but a slight improvement in the contribution from the government sector (on a rounded basis).
The contribution of PCE to the growth of the overall economy partly reflects its size. Over its quantified history, beginning in 1947, PCE has accounted for the majority of overall economic activity. Over the past 50 years, the importance of PCE has grown reflecting the increase in its GDP share. In 1967, PCE accounted for 59 percent of GDP, but by 2016, its share had risen to 69 percent.
However, there has been a significant structural shift in PCE. The figure above shows both the GDP share of “goods” and “services” consumption. As the chart illustrates, there has been a long and uninterrupted decline in consumer spending on goods relative to GDP and a rise in the GDP share of consumer spending on services.
The decline in goods consumption share largely reflects a shrinking share of non-durable goods consumption, while the durable goods consumption share has remained about flat through the years. Meanwhile, housing plays an important role in the growth of personal consumption on services. As shown below, the GDP share of housing services consumption, which, according to previous analysis, includes gross rents (including utilities) paid by renters, and owners’ imputed rent (an estimate of how much it would cost to rent owner-occupied units) and utility payments, has remained the largest category of services consumption. However, its lead has shrunk over the years as spending on healthcare has expanded more quickly.
This analysis indicates that housing’s contribution to GDP is not confined to the production components measured under residential fixed investment, but extends to the housing services component of PCE. The housing services share of GDP is the largest component of services consumption and the second largest category of overall PCE following the broader but declining non-durables goods category. However, the shift in PCE away from goods consumption to services spending primarily reflects strong growth in healthcare spending.