Despite popular myth (and reporting), the answer is no. Let’s discuss how people arrive at these numbers and why they are wrong.

GDP components from the BEA, chart by Mish.

GDP consists of Personal Consumption Expenditures (PCE) plus Residential and Nonresidential Investment plus Government Spending plus CIPI.

CIPI (not shown) stands for change in private inventories. It is a tiny component that nets to zero over time.

You can find those components on the BEA’s GDP Report, Table 3. Gross Domestic Product: Level and Change from Preceding Period.

Questioning This Calculation

The US economy is now almost entirely driven by the services sector:

The services industry now accounts for ~72% of US GDP, up from ~60% in 1990.

By comparison, in the 1950s, services reflected just 47% of the US economy.

On the other hand, the manufacturing sector's share in… pic.twitter.com/j8yvJGGLXc

— The Kobeissi Letter (@KobeissiLetter) August 19, 2024

Consumer Spending is What Percent of the Economy?

Do a search for the above title and you are guaranteed to get a misleading if not incorrect answer.

For example US Bank reports “In 2024, personal consumption expenditures represent nearly 68% of the nation’s GDP.”

To arrive at that answer divide PCE by GDP: 15,733 / 22,919 * 100 = 68.65 percent.

But PCE goods is 5,233. Who is creating those goods? Do they appear by magic?

The answer is manufacturers, farmers, miners, oil drillers, etc., are responsible for all goods created.

In addition, the manufacturers, farmers, miners, oil drillers, etc, all need some services to support their businesses, but that is not personal services so is not a part of PCE services.

Real GDP Select Components in Billions of Dollars

From the above chart, we can calculate personal services as a percent of GDP.

Personal Services Percent = 10,500 / 22,919 * 100 = 45.81 percent. That’s a far cry from the “~72% of US GDP” in the above Tweet.

However, the Kobeissi Letter does have the trends correct.

Real GDP Components as Percent of GDP

Percent of GDP Key Ideas

• The PCE contribution to GDP is barely up from 61.91 percent in 1947 Q1 to 68.65 percent in 2024 Q2.
• The services contribution to GDP has increased from 24.91 percent to 45.82 percent.
• The contribution to GDP excluding PCE services and government spending has decreased from 58.53 percent to 36.71 percent.
• The Government contribution varies from a low of 15.22 percent in 1947 to a high of 25.07 percent in 1953. Government now accounts for 17.47 percent, allegedly. The only way government produces anything is by taking from others.
• Private Residential investment never amounts to much. The max was 7.32 percent in 1950. In the 2005 housing boom the high was 6.68 percent.
• Private Nonresidential is currently 13.64 percent of GDP. The high was 15.35 percent in 1981. The low was 8.95 in 1952.

Manufacturing and farming are the two major subcomponents of GDP excluding PCE services and Government.

Government Negative Contribution

This is interesting. The Congressional Budget Office projects government spending to hit 24.2 percent of GDP with revenues of 17.6 percent of GDP.

The current government contribution to GDP is only 17.47 percent, matching revenues.

Part of this is Social Security at $1,453 billion. That is an expense but does not add to GDP.

GLOBAL DEBT HIT A MASSIVE $315 TRILLION IN Q1 2024

It SKYROCKETED by $15 trillion in 12 months.

As a % of world GDP, it is 333%.

In other words, debt is more than 3 TIMES larger than the global economy.

Since COVID, it has increased by $55 TRILLION 👇https://t.co/lBj0Fxt5Gq

— Global Markets Investor (@GlobalMktObserv) August 19, 2024

Global debt is 333 percent of GDP.

Measuring the Size of the Economy

The Kahn Academy has a very good article on Measuring the Size of the Economy: Gross Domestic Product

Key Points

• The size of a nation’s economy is commonly expressed as its gross domestic product, or GDP, which measures the value of the output of all goods and services produced within the country in a year.
• GDP is measured by taking the quantities of all final goods and services produced and sold in markets, multiplying them by their current prices, and adding up the total.
• GDP can be measured either by the sum of what is purchased in the economy using the expenditures approach or by income earned on what is produced using the income approach. [GDP vs GDI – two measures of the same thing]
• The expenditures approach represents aggregate demand (the demand for all goods and services in an economy) and can be divided into consumption, investment, government spending, exports, and imports. What is produced in the economy can be divided into durable goods, nondurable goods, services, structures, and inventories.
• To avoid double counting—adding the value of output to the GDP more than once—GDP counts only final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production.

That last bullet point explains how these high measures for consumer spending arise.

For example, farmers grow corn and wheat, and raise chickens and cows. Milk is used to produce cheese. A baker takes flour and bakes bread and cookies.

All of the above is attributed to consumer spending in PCE goods when only the final markup at grocery stores should be attributed to the consumer. The same applies to manufactured goods.

Kahn Academy Note on Social Security

It’s important to remember that a significant portion of government budgets are transfer payments—like unemployment benefits, veteran’s benefits, and Social Security payments to retirees—that are excluded from GDP because the government does not receive a new good or service in return or exchange. The only part of government spending counted in demand is government purchases of goods or services produced in the economy—for example, a new fighter jet purchased for the Air Force (federal government spending), construction of a new highway (state government spending), or building of a new school (local government spending).

What About Imports?

Repeat after me: Imports do NOT subtract from GDP although every formula says they do.

This blurb from the Kahn Academy is misleading.

And finally, we must consider exports and imports when thinking about the demand for domestically produced goods in a global economy. First, we calculate spending on exports—domestically produced goods that are sold abroad. Then, we subtract spending on imports—goods produced in other countries that are purchased by residents of this country.

Imports have no impact on GDP, none, by definition.

The D in GDP stands for Domestic. Imports are not domestic but exports are. So why do we subtract imports?

We don’t really, but the formula sure looks like it.

GDP = C + I + G + (X – M) where C is Consumption, I is Investment, G is government, X is Exports and M is Imports.

The problem is we incorrectly attribute imports to domestic sales.

When you buy something on Amazon, the odds are a high percent of that is an import from China.

But we total those sales (incorrectly, generally into PCE goods) and thus need to back out those sales.

Very few people realize this and the GDP formula perpetuates the myth. Kahn needs to explain this better in an otherwise excellent article.

Repeat after me: Imports have no impact on GDP, and can’t by definition. It only appears that way because we incorrectly attribute imports to domestic sales then need to subtract them.

Kahn also has an error on the percent of the economy attributed to the consumer although Kahn does get credit for the key idea of double counting.

Misunderstanding Spending and Services

Returning to the central theme of this post, GDP fails to correct allocate spending on intermediate goods. PCE ignores the fact that someone had to create those goods.

Thus the percentage attributed to consumer spending and services is overstated. Manufacturing is understated but I don’t have a specific number.

We can say services represent ~46 percent of GDP and GDP excluding services and Government is ~37 percent of the economy.

We also need to emphasize the trends are not good, especially government deficit spending.

Another does of Inflation is on deck after the recession plays out.

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