Courtesy of Doug Short.
Note from dshort: The charts in this commentary have been updated to include the Q3 2012 Second Estimate.
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. The improvement in today’s 2.7% Second Estimate over the 2.0% Advance Estimate is largely attributable to a substantial change in private inventories of the Gross Private Domestic Investment component of GDP.
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.
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 been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 0.99 of the real GDP). This is an increase from the 1.42 PCE of the 2.0 GDP in the Advance Estimate for Q3.
Note: The conventional practice is to round GDP to one decimal place, the latest at 2.7. The 2.67 GDP in the chart above is the real GDP calculated to two decimal places based on the BEA chained 2005 dollar data series.
Here is a more detailed look at the changes between the Advance and Second Estimates. I mentioned the significant revision to change in private inventories, but we can also see a number of other areas of revision.
As for the change in private inventories, here is a snapshot of its contribution to quarterly GDP since 2000 with two recessions highlighted. The increase reported today isn’t the pattern we’ve seen in advance of the two 21st century recessions.
As for the role of personal consumption 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 Q3 2012 ratio is 70.51%, fractionally off the all-time high of 71.15% in Q1 2011. This decline in the PCE component should not be taken as a cause for alarm. Note, for example. the volatility of this metric during mid-1990s. Also, from a theoretical perspective, there is a point at which personal consumption as a percent of GDP can’t really go any higher. At the low 70 percent, we may be approaching that level. As for the change in private inventories, here is a snapshot of its contribution to quarterly GDP since 2000 with two recessions highlighted. The increase reported today isn’t the pattern we’ve seen in advance of the two 21st century recessions.
Let’s close with a look at the inverse behavior of PCE and Gross Private Investment (GPDI) during recessions. PCE generally increases as a percent of GDP whereas Private Investment declines. That is not what we’re seeing in the current data. I’ve plotted the two with different vertical axes (PCE on left, GPDI on the right) to highlight the frequent inverse correlation.
I’ll update these charts when the Q3 Third Estimate is released next month.
