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Monday, February 6, 2023


Real Personal Consumption Expenditures and Recessions

Courtesy of Doug Short.

The latest release of Personal Consumption Expenditures, following Friday’s release of the Advance Estimate of Q4 GDP, gives us an opportunity to analyze consumption at a monthly granularity, in contrast to the quarterly data in GDP.

The US economy is mostly about consumption, which accounts for about 70% of Gross Domestic Product. In fact, if we study the quarterly reporting of GDP from its inception in 1947, Personal Consumption Expenditures (PCE) have ranged from a low of 60.5% in Q3 1951 to a high of 71.2% in Q3 2009. As of the most recent quarter, PCE is an even 71% of GDP.



It’s also interesting to note the shift over time in the three components of PCE: Durable Goods, Non-Durable Goods and Services. Here are two pie charts showing the shift since 1959, the first year that the Bureau of Economic Analysis provides the component breakdown on a monthly basis.

The growth in services has been dramatic, as the nation has increasingly shifted to a services economy. The consumption of Durable Goods (items with a 3+ year lifespan) is somewhat smaller five decades later, but the most conspicuous change is the growth of services in relation to Non-Durable Goods.

If we look at the overall growth of consumption over this timeframe, the year-over-year change in monthly real PCE has been quite volatile. The chart below shows the YoY change along with recessions. I’ve also highlighted the YoY rate of change at the month each recession began.



The December 2011 YoY change in PCE, to two decimal points, is the same as December 2007, the month when the last recession began. Since our 1960 start date, the start of all recessions prior to the 2007-2009 event coincided with higher YoY Real PCE. Over this timeframe, there have been only two months not contiguous with a recession with a lower YoY Real PCE than the current level: 1.40% in September 1987 (the month before the market crash of 1987) and 1.16% in October 2002, twelve months after the end of the 2001 Recession.

Year-over-year Real PCE is telling much the same story as YoY Real GDP, as this chart, updated through Q4 2011, suggests.



As I’ve pointed out in my weekly updates, ECRI has issued a recession call, presumably one that would (if accurate) be backdated by the NBER to the first or second quarter of 2012. Hoisington Management is also forecasting a 2012 recession, a call they support with specific analysis in their Q4 report.

As I’ve shown above, the latest YoY Real PCE is at a level that would seem to warn of an imminent recession. On the other hand, we can point to 1987 and 2002 as non-recessionary precedents for the current YoY PCE data. If today’s situation is reminiscent of either of these earlier periods, let’s hope it’s comparable to 2002 and not a prelude to a crash like the one in 1987.





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