In our analysis Asylum Markets of the post FIRE Economy – Part II: Breaking the Rules we discovered that Personal Consumption Expenditures, the non-government expenditure portion of GDP, had by the end of 2009 recovered to pre-Great Recession levels. How can this be when the recession cost millions their jobs, consumer credit contracted for the first time on record and is still contracting, and depressing signs of consumer retrenchment line the main streets and blights the malls of every town and city in the U.S. with thousands of closed down and boarded up retail stores?
If not from cash income earned on the job or credit tapped from credit card and other revolving credit sources, where is the money coming from to finance the consumer economy recovery? What is “Personal Consumption Expenditures” anyway?
A seemingly simple and innocent question about personal expenditures once again leads us to unexpected places, in this case through the bowels of the U.S. National Income and Product Accounts (NIPA) and Fed Flow of Funds data. There we discovered that approximately half of the Personal Consumption Expenditures (PCE) measure appears to have little to do with consumers spending money on dinners and iPods in the Productive Economy and everything to do with paying interest on mortgages, bank fees, and other economic rents in the FIRE Economy. In the process, we discover just why the economy feels as bad as it does even though the PCE numbers present an economy on a rapid recovery path, and why the latest GDP report is utter nonsense.