Courtesy of Doug Short.
Note from dshort: The charts in this commentary have been updated to include the Q4 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. That noticeable change in today’s 0.1 percent Second Estimate from the -0.1 percent in the Advance Estimate was the revisions to the Next Exports of Goods and Services.
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 1.47 of the 0.1 real GDP (down slightly from 1.52 in the Advance Estimate). This is an increase from the 1.12 PCE of the 3.1 GDP in the Third Estimate for Q3.
Note: The conventional practice is to round GDP to one decimal place, the latest at 0.1. The 0.13 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 close look at the contribution changes from the Advance to Second Estimates. The upward revision to Net Exports stands out.
Here a similar look at the contribution changes between across the four quarters of 2012.
As for the negative 1.54 contribution from private inventories, let’s look at this component over the last twelve quarters. It is highly volatile and, in my view, not very useful in forecasting GDP trends:
The decline in defense spending, no doubt a disturbing development for militant conservatives, was not surprising given the war drawdown. This trend may also be in part the result of planning for sequestration.
The falloff in goods exports (a minus 0.56 contribution) is a definite anomaly resulting primarily from the drought in the US, but this is an upward revision from -080 in the Advance Estimate. It is the first negative contribution of goods exports since the end of the last recession.
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 Q4 2012 ratio is 70.87%, fractionally off the all-time high of 71.15% in Q1 2011 but fractionally higher than last quarter’s 70.46%. 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 percents, we may be approaching that level.
The one caution I have regarding today’s strong 1.47% contribution of PCE to GDP (a slight revision from the 1.52 in the Advance Estimate) is the likelihood that tax planning strategies to avoid the expected 2013 tax hike were a key factor in the end-of-year spending increase. Q1 2013 will probably show the opposite effect, a phenomenon I’ve highlighted before in my graphs of personal income.
Let’s close with a look at the inverse behavior of PCE and Gross Private Investment (GPDI) during recessions (note my use of different vertical scales to facilitate the overlay). 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.
Some Final Thoughts
The consensus among economists was for a 0.5 percent print for the Q4 2012 Second Estimate. How did the economists arrive at their estimate? A likely key factor is the historical pattern of revisions. Here is a comment from today’s BEA update:
The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, real GDP declined 0.1 percent. The upward revision to the percent change in real GDP is smaller than the average revision from the advance to second estimate of 0.5 percentage point.
The latest trade report put a favorable spin on the Net Exports component of GDP, so a 0.5 percent upward revision (give or take) was a safe forecast, lacking any other significant news.
I’ll update these charts when the Q4 Third Estimate is released next month.
