Personal Consumption vs. GDP: The Basis of Our Economy

Our economy is somewhere in the neighborhood of 65% consumer driven, meaning 65% of economy is based on the consumers. I believe the totals for government is somewhere around 21% and I know agriculture is about 6%. The rest is manufacturing and business spending. So, with the GDP release on Friday, along with Personal Income and its distribution yesterday, I figured I would combine the look of the two.

What is important to understand is that I build my analysis up with the framework that the consumer is the foundation of the economy. Being around 65% of our economy, that's not a far fetched statement. I also believe that our consumption habits are what ultimately drive how our economy will look, especially GDP.

With that, here are two charts for GDP and Personal Consumption:

Comparing these two charts, you can see how they move almost lockstep. Wish I could put the two charts together. But, Excel doesn't really excel in the "easy to use" realm. I've gotten hints from a few readers, but they don't seem to work on an Apple computer. Nonetheless, if I were to put the two charts in the sam chart, you would see that when consumption moves up or down, GDP moves the same.

Looking at the latest moves in consumption, I don't see a whole lot of hope for a push higher in GDP in the next quarter. More bad news ahead.

The silver lining? Less inflation via the Price Deflator:

That should give the Fed some wiggle room, just in case they ever start to mention the "accommodation" word again.

Comments

[Bruce Merri...:]

David...now if you plot M2/FFR (Federal Funds Rate), and forward it one year, you will see that it nicely coincides with the GDP and all the others. Then if you plot inflation over these same periods, and lag it one year...it aslo coincides.

Bruce Merrifield

2007 May 01 09:59 AM