2/28/2024

PCE: definition and measurement

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After the end of the reporting season, the market’s attention is again focused on macro statistics of the US economy. One of the most important economic indicators is the PCE index, which can influence the Fed’s future decisions on interest rates.

Personal consumption expenditures, also known as the PCE index, is a total measure of the U.S. population’s spending on goods and services. According to the Bureau of Economic Analysis (BEA), PCEs account for about two-thirds of domestic spending and are one of the most important drivers of gross domestic product (GDP) growth.

BEA calculates total PCE to measure and track changes in consumer spending over time. This information allows us to assess economic activity and the impact of price changes on consumer behavior.

Personal spending and income statistics are published monthly in the report. The report also contains the latest data on the personal consumption expenditure price index (PCEPI), which measures price movements and serves as an indicator of inflation.

How to understand the PCE index

Consumer spending (PCE) is one of the key factors driving the US economy. They make up a significant portion of GDP, making PCE a leading economic indicator. PCE allows you to analyze the purchasing habits of the population and the level of savings.

Economists and analysts use PCE to forecast future spending and economic growth. This information helps companies adjust their business plans, evaluate product and service needs, and make hiring and investment decisions.

How PCE is measured

PCE, like most economic indicators, is divided into two categories: consumer goods and services. Consumer goods, in turn, are distinguished into durable (service life more than 3 years) and short-term (service life less than 3 years) goods.

  • Durable goods: automobiles, furniture and appliances, recreational goods and vehicles.
  • Non-durable goods: food and drinks, clothing and shoes, gasoline and other energy resources.
  • Services: housing and communal services, healthcare, transportation services, recreation services, food and accommodation, financial services and insurance.

Advantages and Disadvantages of PCE

Advantages:

  • Information on the state of the economy: PCE provides an assessment of the current state of the economy, which is important for economic policy making and business decisions.
  • Consumer demand indicator: An increase in PCE indicates an increase in consumer demand, which is a sign of a healthy economy, just as, on the contrary, a decrease signals problems.
  • Broad coverage: PCE takes into account spending on a wide range of goods and services, providing a more complete picture of consumer spending.

Disadvantages:

  • Measurement Errors: PCE may contain errors that occur during data collection and processing.
  • Classification errors: Inaccuracies in the classification of data by economic sector can affect the reliability of the indicator.
  • Data Revisions: Historical PCEs may be revised, making it difficult to analyze long-term trends.
  • Estimation Imprecision: Some economists believe that PCE does not always accurately reflect personal consumption expenditures.

Overall, PCE is a valuable tool for economists, analysts and business leaders, but it is important to understand its limitations in order to use the indicator effectively.

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