Courtesy of Doug Short.
The chart below is my way to visualize real GDP change since 2007. I’ve used a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. Here is the latest overview from the Bureau of Labor Statistics:
The deceleration in real GDP growth in the fourth quarter primarily reflected an upturn in imports, a downturn in federal government spending, and decelerations in nonresidential fixed investment and in exports that were partly offset by an acceleration in PCE, an upturn in private inventory investment, and an acceleration in state and local government spending.
Let’s take a closer look at the contributions of GDP of the four major subcomponents. My data source for this chart is the Excel file accompanying the BEA’s latest GDP news release (see the links in the right column). Specifically, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product.
Note: The conventional practice is to round GDP to one decimal place, the latest at 2.2. The 2.19 GDP in the chart above is the real GDP calculated to two decimal places based on the BEA chained 2009 dollar data series.
Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has usually been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 2.83 of the 2.19 real GDP. The Q4 contribution from PCE increased from 2.21 in the previous quarter.
The contribution from Gross Private Domestic Investment saw the least unchange.
The plunge Net Exports, not surprisingly given the dollar strength, was the major GDP drag, along with the drop National Defense.
Here is a look at the contribution changes between over the past four quarters. The difference between the two rightmost columns was addressed in the GDP summary quoted above. I’ve added arrows to highlight the quarter-over-quarter change for the major components.
As for the role of Personal Consumption Expenditures (PCE) in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947. The latest ratio is 68.1%, fractionally below the all-time high of 68.7% in Q1 2011. From a theoretical perspective, there is a point at which personal consumption as a percent of GDP can’t really go any higher. We may be hovering in that upper range.
Let’s close with a look at the inverse behavior of PCE and Gross Private Domestic Investment (GPDI) during recessions. PCE generally increases as a percent of GDP whereas GPDI declines. That is not what we’ve been seeing in recent quarters. Note that I’ve plotted the two with different vertical axes (PCE on left, GPDI on the right) to highlight the frequent inverse correlation.
The Third Estimate for Q4 GDP will published on March 27.
