# Presentation: 665444

## Personal Consumption Expenditures

**New Classification System**

**                            ****Clint McCully**, Chief 			      **Consumption Branch, NIWD**
*National Economic Accounts Data Users’ Conference*
*New York, NY*
- October 15, 2007

**Notes:**
This Sunday will mark the 60th anniversary of Jackie Robinson’s 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, however—and I’m not talking about my birth that year— 

## PCE ClassificationBackground

- PCE classification system born in 1947
- Since 1947 . . .
- Large increases in consumer incomes
- Changes—demographic, technological, cultural, legal, tastes
- Many new goods and services
- Increased importance of services, including nonprofit organizations
- Marginalization/obsolescence of other goods and services
- New and expanded sources of funding
- PCE classification in 2007
- About the same as 1947

**Notes:**
. . . was the birth of the PCE classification system.

1947 was a time when:
 	A first class stamp cost 3 cents
	Many people heated their homes with coal 
	Telegrams were a significant form of communication
	Gambling was legal in one state
	There were no:
		Cell phones
		Personal computers	
		Internet
	Movies 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)

## New PCE ClassificationWhat It Is

- New structures
- Type of expenditure (functional)
- Type of product (by durability)
- Functional structure combines structures for individual and nonprofit consumption in the 1993 UN *System of National Accounts*
- Classification of Individual Consumption by Purpose (COICOP)
- Classification of Total Outlays of Non-Profit Institutions Serving Households (NPISH) by Purpose (COPNI)
- Product structure more closely aligned with functional structure

**Notes:**
Our answer was that it was not still relevant, and that a new system was needed—not 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 expenditure
	Type of product
New functional structure combines COICOP & COPNI

Product structure follows SNA durables, semidurables, nondurables, services

## New PCE ClassificationWhat It Accomplishes

- Creates a relevant, logical and demand-based structure
- Accounts 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

**Notes:**
Just read from slide.

## PCE Classification Overview

**Structure**
- 		Major aggregates.......
-                     Sub-aggregates ........
- 	      	              Categories......... (time series)
- 	                         Commodities ....... (I/O)
- 	                                Items ......... (I/O)
**	**
**Classification types**
- Type of product — by durability
- Type of expenditure — by purpose
- Correspondence at the category level

**Notes:**
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 expenditure—the component categories are the same for both.  

## New PCE Classification Incorporation

- 2002 I/O benchmark estimates
- Functional classification
- Released in September 2007
- Benchmark estimates in 2009
- Time series back to 1929

**Notes:**
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.

## PCE Functional Classification: New and current

**	****CURRENT**
- Food and tobacco
- Clothing, accessories, and jewelry
- Personal care
- Housing
- Household operation
- Medical care
- Personal business
- Transportation
- Recreation
- Education and research
- Religious and welfare activities
- Foreign travel by U.S. residents

**	****NEW**** **
**          ****Household Consumption Expenditures**
- 1. Food and beverages purchased for off-premise consumption
**2. **Clothing and footwear
**3. **Housing and utilities
**4. **Furnishings, household equipment and routine household maintenance
**5. **Health
**6. **Transportation
**7. **_**Communication**_
**8. **Recreation
**9. **Education
**10.**_** Food services and accommodations**_
**11.**_** Financial services and insurance**_
**          ****12.**_** Other goods and services**_
-           **13.** Net foreign travel and expenditures abroad
**	**_**Final Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)**_

**1997 ($billions)**

**5547.4**
**5440.2**
- 474.9
-   263.8
-   986.4
-   282.7
-   932.8
-   634.4
-   121.6
-   521.9
-     98.3
-   348.0
- 427.6
- 368.8
- -21.1
- 107.3

**5547.4**
- 850.0
- 337.4
- 82.9
- 842.6
- 616.2
- 1002.8
- 412.9
- 685.2
- 474.5
- 129.7
- 134.2
- -21.1

**No change in total**

**Notes:**
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.

## PCE Functional Classification: New and current

**	****CURRENT**
- Food and tobacco
- Clothing, accessories, and jewelry
**Personal care**
- Housing
- Household operation
- Medical care
**Personal business**
- Transportation
- Recreation
- Education and research
- Religious and welfare activities
- Foreign travel by U.S. residents

**	****NEW**** **
**          ****Household Consumption Expenditures**
- 1. Food and beverages purchased for off-premise consumption
**2. **Clothing and footwear
**3. **Housing and utilities
**4. **Furnishings, household equipment and routine household maintenance
**5. **Health
**6. **Transportation
**7. **_**Communication**_
**8. **Recreation
**9.**Education
**10.**_** Food services and accommodations**_
**11.**_** Insurance and other financial services**_
**          ****12.**_** Miscellaneous goods and services**_
-           14. Net foreign travel and expenditures abroad
**	**_**Final Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)**_

**1997 ($billions)**

- 5547.4
- 5440.2
-   474.9
- 263.8
-   986.4
-   282.7
-   932.8
-   634.4
-   121.6
-   521.9
-     98.3
-   348.0
- 427.6
- 368.8
- -21.1
- 107.3

- 5547.4
- 850.0
- 337.4
- 82.9
- 842.6
- 616.2
- 1002.8
- 412.9
- 685.2
- 474.5
- 129.7
- 134.2
- -21.1

- New categories

**Disappearing Categories**

**Notes:**
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.

## PCE Functional Classification: New and current

**	****CURRENT**
- Food and tobacco
- Clothing, accessories, and jewelry
- Personal care
- Housing
- Household operation
- Medical care
- Personal business
- Transportation
- Recreation
- Education and research
- Religious and welfare activities
- Foreign travel by U.S. residents

**	****NEW **
**          ****Household Consumption Expenditures**
- 1. Food and beverages purchased for off-premise consumption
**2. **Clothing and footwear
**3. **Housing and utilities
**4. **Furnishings, household equipment and routine household maintenance
**5. **Health
**6. **Transportation
**7. **_**Communication**_
**8. **Recreation
- 9. Education and research
**10.**_** Food services and accommodations**_
**11.**_** Financial services and insurance**_
**          ****12.**_** Other goods and services**_
-           13. Net foreign travel and expenditures abroad
**	**_**Final Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)**_

**474.9**

- 18.2  Pet food

- 303.2

- 53.8 Tobacco

**Notes:**
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.

## PCE Functional Classification: New and current

**	****CURRENT**
- Food and tobacco
- Clothing, accessories, and jewelry
- Personal care
- Housing
- Household operation
- Medical care
- Personal business
- Transportation
- Recreation
- Education and research
- Religious and welfare activities
- Foreign travel by U.S. residents

**	****NEW **
**          ****Household Consumption Expenditures**
- 1. Food and non-alcoholic beverages
- 2. Clothing and footwear
**3. **Housing and utilities
**5. **Furnishings, household equipment and routine household maintenance
**6. **Health
**7. **Transportation
**8. **_**Communication**_
**9. **Recreation
- 10.Education
**11.**_** Food services and accommodations**_
**12.**_** Financial services and insurance**_
**          ****13.**_** Other goods and services**_
-           14. Net foreign travel and expenditures abroad
**	**_**Final Consumption Expenditures of Nonprofit Institutions Serving Households (NPISH)**_

**103.6  Telephone**

**188.7**

**268.1**

**Notes:**
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 doesn’t 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.

## PCE Product Classification 

_**NEW Structure**_

_**CURRENT Structure**_

- Durable Goods
-    Motor vehicles and parts
-    Furnishings and durable household
-      equipment
**  **_**Recreational goods & vehicles**_
-   Other durable goods
- Nondurable Goods
-   Food and  beverages purchased for off-
-     premise consumption_** **_
**  **Clothing and footwear
-   Gasoline and other energy goods
-   Other nondurable goods

**Durable Goods**
**  **Motor vehicle and parts
-   Furniture and household
-     equipment
-   Other
**Nondurable Goods**
**  **Food
-   Clothing and shoes
-   Gasoline, fuel oil & other energy
-     goods
-   Other

- 721.6
- 293.1
- 166.0
- 154.6
- 107.8
- 1292.8
- 474.9
- 249.3
- 147.7
- 421.0

**692.7**
- 305.1
- 256.2
- 131.4
**1619.0**
- 796.2
- 258.1
- 147.7
- 416.9

**1997**

**Purchased meals to services**

**Notes:**
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.

## PCE Product Classification (cont.)

_**NEW Structure**_

_**CURRENT Structure**_

**Services**
-   Housing
-   Household operation services
-   Transportation services
-   Medical care services
-   Recreation services
-   Other services

**Services**
**  ****Household consumption**
**    ****expenditures  **
-     Housing and utilities
-     Health care
-     Transportation services
-     Recreation
**    ****Food services & accommodations**
**    ****Financial services and insurance**
**    **Other services
-   **Final consumption expenditures of**
**    ****nonprofit institutions serving **
**    ****households**

**3533.0**
- 3425.9
- 973.2
- 803.8
- 206.9
- 213.9
- 348.0
- 427.6
- 452.3
- 107.2

**1997**

**3235.8**
- 842.6
- 337.0
- 245.7
- 873.0
- 215.1
- 722.4

**New categories**

**Notes:**
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.

## PCE Product Classification 

_**NEW Structure**_

_**CURRENT Structure**_

**Durable Goods**
- Motor vehicles and parts
- Recreational equipment & vehicles
- ........
**Nondurable Goods**
- ........
**Services**
- .......

**Durable Goods**
- Motor vehicle and parts
- Furniture and household equipment
- Others
**Nondurable Goods**
- Food
- Clothing and shoes
- Gasoline, fuel oil & other energy goods
- Others
**Services**
- Housing
- Household operation services
- Transportation services
- Medical care services
- Recreation services
- Other services

**254.0**

**9.2**

**Notes:**
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.

## PCE Product Classification 

_**NEW Structure**_

_**CURRENT Structure**_

**Durable Goods**
- ........
**Nondurable Goods**
- Food and non-alcoholic beverages
- ........
- Nondurable recreational items, n.e.c.
- ........
**Services**
**......****..**
**Food services & accommodations**
**......****.**

**Durable Goods**
- Motor vehicle and parts
- Furniture and household equipment
- Others
**Nondurable Goods**
- Food
- Clothing and shoes
- Gasoline, fuel oil & other energy goods
- Others
**Services**
- Housing
- Household operation services
- Transportation services
- Medical care services
- Recreation services
- Other services

**Notes:**
This shows the effect of the reclassification on food.