Personal Consumption Expenditures

New Classification System Clint McCully, Chief Consumption Branch, NIWD

National Economic Accounts Data Users ConferenceApril 13, 2007

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PCE ClassificationBackground

PCE classification system born in 1947Since 1947 . . .Large increases in consumer incomesChangesdemographic, technological, cultural, legal, tastesMany new goods and servicesIncreased importance of services, including nonprofit organizations Marginalization/obsolescence of other goods and servicesNew and expanded sources of fundingPCE classification in 2007About the same as 1947

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New PCE ClassificationWhat It Is

New structuresType of expenditure (functional)Type of product (by durability)Functional structure combines structures for individual and nonprofit consumption in the 1993 UN System of National AccountsClassification of Individual Consumption by Purpose (COICOP)Classification of Total Outlays of Non-Profit Institutions Serving Households (NPISH) by Purpose (COPNI) Product structure follows SNA classification of durable goods, semidurable goods, nondurable goods, and services

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New PCE ClassificationWhat It Accomplishes

Creates a relevant, logical and demand-based structureAccounts for transactions between households and NPISH Achieves greater consistency with household surveys Improves PCE deflation by precisely matching categories with associated price indexes Facilitates comparisons with other countries

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PCE Classification OverviewStructureMajor aggregates. Sub-aggregates .. Categories (time series) Commodities . (I/O) Items (I/O)Classification typesType of product by durability Type of expenditure by purpose Correspondence at the category level

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New PCE Classification Incorporation

2002 I/O benchmark estimatesFunctional classificationReleased in 2007

Benchmark estimates in 2008 Time series back to 1929

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PCE Functional Classification: New and current

CURRENT

Food and tobaccoClothing, accessories, and jewelryPersonal careHousingHousehold operationMedical carePersonal businessTransportation

RecreationEducation and researchReligious and welfare activities

Foreign travel by U.S. residents

NEW Household Consumption Expenditures1. Food and non-alcoholic beverages2. Alcoholic beverages and tobacco3. Clothing and footwear4. Housing, water, electricity, gas and other fuels5. Furnishings, household equipment and routine household maintenance6. Health7. Transportation8. Communication9. Recreation and culture10.Education11. Restaurants and accommodation services12. Insurance and other financial services 13. Miscellaneous goods and services 14. Net foreign travel and remittancesFinal Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)19975547.45440.4 421.5 115.4 263.8 999.1

268.1

932.8 634.4 121.6 521.9 98.3 340.6427.6326.0-21.1107.3

5547.4

850.0337.4

82.9842.6616.21002.8412.9685.2

474.5129.7134.2

-21.1

No change in total

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PCE Functional Classification: New and current

CURRENT

Food and tobaccoClothing, accessories, and jewelryPersonal careHousingHousehold operationMedical carePersonal businessTransportation

RecreationEducation and researchReligious and welfare activities

Foreign travel by U.S. residents

NEW Household Consumption Expenditures1. Food and non-alcoholic beverages2. Alcoholic beverages and tobacco3. Clothing and footwear4. Housing, water, electricity, gas and other fuels5. Furnishings, household equipment and routine household maintenance6. Health7. Transportation8. Communication9. Recreation and culture10.Education11. Restaurants and accommodation services12. Insurance and other financial services 13. Miscellaneous goods and services 14. Net foreign travel and remittancesFinal Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)19975547.45440.4 421.5 115.4 263.8 999.1

268.1

932.8 634.4 121.6 521.9 98.3 340.6427.6326.0-21.1107.3

5547.4

850.0337.4

82.9842.6616.21002.8412.9685.2

474.5129.7134.2

-21.1

New categoriesDisappearing Categories

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PCE Functional Classification: New and current

CURRENT

Food and tobaccoClothing, accessories, and jewelryPersonal careHousingHousehold operationMedical carePersonal businessTransportationRecreationEducation and researchReligious and welfare activitiesForeign travel by U.S. residents

NEW Household Consumption Expenditures1. Food and non-alcoholic beverages2. Alcoholic beverages and tobacco3. Clothing and footwear4. Housing, water, electricity, gas and other fuels5. Furnishings, household equipment and routine household maintenance6. Health7. Transportation8. Communication9. Recreation and culture10.Education and research11. Restaurants and accommodation services12. Insurance and other financial services 13. Miscellaneous goods and services 14. Net foreign travel and remittancesFinal Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)421.5115.418.2 Pet food294.9

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PCE Functional Classification: New and current

CURRENT

Food and tobaccoClothing, accessories, and jewelryPersonal careHousingHousehold operationMedical carePersonal businessTransportationRecreationEducation and researchReligious and welfare activitiesForeign travel by U.S. residents

NEW Household Consumption Expenditures1. Food and non-alcoholic beverages2. Alcoholic beverages and tobacco3. Clothing and footwear4. Housing, water, electricity, gas and other fuels5. Furnishings, household equipment and routine household maintenance6. Health7. Transport8. Communication9. Recreation and culture10.Education and research11. Restaurants and accommodation services12. Insurance and other financial services 13. Miscellaneous goods and services 14. Net foreign travel and remittancesFinal Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)103.6 Telephone188.7268.1

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PCE Product Classification NEW StructureCURRENT StructureDurable Goods Motor vehicles Furnishings & durable household equipment Recreational equipment & vehicles Other durable goodsNondurable Goods Semidurable goods Clothing and footwearRecreational and reading itemsHousehold itemsMotor vehicle parts & accessoriesPersonal items Other nondurable goodsPurchased food, beverages and tobaccoGasoline and other energy goodsOther nondurable goods, n.e.c.

Durable GoodsMotor vehicle and partsFurniture and household equipmentOther

Nondurable GoodsFoodClothing and shoesGasoline, fuel oil & other energy goodsOther

557.6254.0130.8

99.773.21465.0473.8249.3114.458.339.1

12.8991.2537.0

147.7306.6

692.7305.1256.2

131.4

1619.0796.2258.1147.7416.9

1997To semidurablesPurchased meals to servicesNew categories

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PCE Product Classification (cont.)NEW StructureCURRENT StructureServices

Housing Household operation services Transportation services Medical care services Recreation services Other services

Services Household consumption expendituresHousing and utilitiesHealth careTransportation servicesRecreational and cultural activitiesRestaurants and accommodation servicesInsurance and other financial servicesOther services Final consumption expenditures of nonprofit institutions serving households3524.8

3417.6

975.9803.8206.9213.9340.6

427.6

448.9107.2

19973235.8

842.6337.0245.7873.0215.1722.4

New categories

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PCE Product Classification NEW StructureCURRENT StructureDurable GoodsMotor vehiclesRecreational equipment & vehicles..Nondurable GoodsSemidurable goodsMotor vehicle parts & accessories..Other nondurable goods..

Services.

Durable GoodsMotor vehicle and partsFurniture and household equipmentOthersNondurable GoodsFoodClothing and shoesGasoline, fuel oil & other energy goodsOthersServicesHousingHousehold operation servicesTransportation servicesMedical care servicesRecreation servicesOther services

254.09.241.9

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PCE Product Classification NEW StructureCURRENT StructureDurable Goods..Nondurable GoodsSemidurable goodsOther nondurable goodsFood and non-alcoholic beveragesAlcoholic beverages & tobacco..Nondurable recreational items, n.e.c...

Services..Restaurants & accommodation.

Durable GoodsMotor vehicle and partsFurniture and household equipmentOthersNondurable GoodsFood Clothing and shoesGasoline, fuel oil & other energy goodsOthersServicesHousingHousehold operation servicesTransportation servicesMedical care servicesRecreation servicesOther services

This Sunday will mark the 60th anniversary of Jackie Robinsons breaking of the color barrier in baseball. 1947 was also the year that India and Pakistan gained their independence from Great Britain. Perhaps most momentously, howeverand Im not talking about my birth that year . . . was the birth of the PCE classification system.

1947 was a time when: A first class stamp cost 3 centsMany people heated their homes with coal Telegrams were a significant form of communicationGambling was legal in one stateThere were no:Cell phonesPersonal computersInternetMovies could only be watched in movie theaters(CLICK)Since 1947, there have been many changes relevant to PCE, including . . . (CLICK)PCE classification in 2007 is just about the same as in 1947, so it made perfect sense to ask whether or not it was still relevant. (CLICK)

Our answer was that it was not still relevant, and that a new system was needednot a tweaking of the existing system, but an entirely new system, analagous to the replacement of the replacement of the Standard Industrial Classification system (SIC) with NAICS.

New structures have been created for the two primary structures used for PCE:Type of expenditureType of productNew functional structure combines COICOP & COPNI

Product structure follows SNA durables, semidurables, nondurables, services

Just read from slide.The PCE classification structures comprise component categories composed of one or more commodities, and aggregations of those categories into subaggregates and major aggregates.

There are two primary types of PCE classification: by type of product and by function or type of expenditurethe component categories are the same for both. The new functional structure will be incorporated into the 2002 input-out estimates to be released later this year.

Time series estimates reflecting the new product and functional classification structures will be released with the 2008 benchmark NIPA estimates, with series back to 1929 on the new classification basis.This shows the new PCE functional classification compared to the current structure. The first thing to note is that the PCE total is not affected by the reclassification, though there will likely be minor changes in the chained-dollar totals due to reweighting of components.The next thing to notice is that under the new structure, household consumption expenditures will be distinguished from nonprofit expenses. In the current structure, the gross operating expenses of nonprofit organizations are included in a number of categories. In the new structure, purchases from nonprofit organizations are included in household consumption expenditures, and expenses net of sales to households are the measure of nonprofit expenditures. There are a number of new categories in the new structure, as indicated, including alcoholic beverages and tobacco, communication, restaurants and accommodation services, insurance and other financial services, and miscellaneous goods and services. Two categories in the existing structure, personal care and personal business, will disappear entirely, and the contents of most other categories will be altered, in some cases significantly.This provides an example of one of the significant changes, to food and tobacco, which will now be all or part of 4 different categories (POINT)

Of particular note is the classification of purchased meals and beverages with the new category of restaurants and accommodation services. This makes sense in a number of ways. First, purchased meals have a very large service component, so large that these are properly classified as services rather than goods. The gross margins on purchased meal sales are significantly larger than for any kind of retail establishment. This treatment is entirely consistent with the Accommodation and Food Services industry in NAICS. Secondly, in the construction of the core PCE price index, which excludes food and energy and which is intended to exclude volatile prices, the inclusion of food services in this index makes sense because food services prices are not at all volatile.This shows another significant change, for household operation, where fuel and other utilities will no be included with housing, furnishings and household services in a new category, and telephone services in a new communications category.

The inclusion of telephone services in the new communications category makes sense because their present inclusion in household operation reflects their treatment as a household utility akin to gas and electricity and a time when personal telephone service was entirely tied to the home. It simply doesnt make sense anymore, with expenditures on cellular telephone services exceeding those for local phone service, and with cellular telephone expenditures approaching 50 percent of all telephone services expenditures.This shows the new product structure compared to the current structure. There are several things to note. The first is that nondurable goods are now divided into semidurable goods and other nondurable goods. And, as with the functional structure, there are a number of new categories. The size of durable goods shrinks, as a number of categories, including motor vehicle parts and accessories, are now included in semidurable goods. The net change to nondurable goods, though, is negative, because of the reclassification of purchased meals and beverages to services.In services, you can see the effect of this reclassification, as most of the increase in the value of services is accounted for by purchased meals and beverages.

This shows the effect of reclassification on motor vehicles and parts, where recreational vehicles are classified with the new category recreation equipment and vehicles, and motor vehicle parts and accessories are now in semidurable goods.This shows the effect of the reclassification on food.