Visualizing GDP: The Consumer Is Key

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 last week’s 1.8 percent Third Estimate (rounded from 1.78) from 2.4 percent in the Second Estimate was explained in last week’s press release as follows:

The increase in real GDP in the first quarter primarily reflected positive contributions from PCE, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, state and local government spending, and exports. Imports, which are a subtraction in the calculation of GDP, decreased.

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 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 1.83 of the 1.78 real GDP, up from 1.28 in Q4. In fact, not only did PCE make the largest contribution, it was fractionally larger than the annualized Q1 GDP. The other three headline components (Gross private domestic investment, Net exports of goods and services and Government consumption expenditures) essentially were a wash.

Note: The conventional practice is to round GDP to one decimal place, the latest at 1.8. The 1.78 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 look at the contribution changes between over the past four quarters.

As for the negative 1.52 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:

As for the role of Personal Consumption Expenditures 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 70.72 percent, fractionally off the all-time high of 71.15 percent in Q1 2011 but fractionally higher than last quarter’s 70.86 percent. 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.

Let’s close with a look at the inverse behavior of PCE and Gross Private Investment 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.

Doug Short Ph.d is the author of dshort at Advisor Perspectives.

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