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Monday, February 6, 2023


Real Final Sales Set to Decelerate?

Courtesy of Doug Short.

With the release of the Advance Estimate of Q4 2011 GDP less than two weeks away, the economists surveyed by the Wall Street Journal are forecasting accelerating growth for the US economy and generally discount the odds of a recession in the next 12 months (more here). With this optimism for context, let’s take a step back and look at some interesting correlations between components of GDP and the onset of recessions.

Recessions began in the past when Real Final Sales of Domestic Product (note) and Real Personal Consumption Expenditures (PCE) fell below 2.5% year-over-year and Real GDP overall fell below 2%. Why? Evidently 2.5% is the effective threshold below which consumption cannot sustain employment, labor force growth, and production replacement (capital and labor).

Note in the first chart below that Real Final Sales (the red line) have yet to accelerate above the historical recession threshold. And the final revision of Q3 2011 GDP (not shown) came in at 1.8%.

However, the 2.5% recession threshold in the past was maintained with the average real GDP trend of 3.3% (2.3% per capita), whereas the trend for real GDP has been cut in half since 2000 (and is below 1% on a per-capita basis) See this GDP chart for a look at the long-term GDP trend.

As the next chart illustrates, the YoY Real Disposable Income likewise bodes ill for the economy. It is at a level lower than its trough in six of the past eight recessions. Only once, during the Crash of 1987, has this metric fallen to the current level outside the bounds of a recession.

With Real Final Sales still effectively in historical recession territory, it is not inconceivable that a new lower threshold for YoY real growth has emerged for an “official” recession to be declared.

Might the new “new normal” threshold for an “official” recession be 1% or slower instead of 2.5%? Economists and politicians will be able to claim that the economy “continues to recover” at a slow, steady, “non-inflationary” rate, all the while the unemployment rate only falls because the long-term unemployed fall off the rolls and Boomers in accelerating numbers leave the full-time regular labor force en masse.

Note: Final sales of domestic product is GDP less change in private inventories; equivalently, it is the sum of PCE, private fixed investment, government consumption expenditures and gross investment, and net exports of goods and services.





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