By Jill Mislinski
Note: The charts in this commentary have been updated to include the Q3 2017 Second Estimate released Thursday morning.
The chart below is a way to visualize real GDP change since 2007. It uses 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. Here is the latest overview from the Bureau of Labor Statistics:
Real gross domestic product (GDP) increased at an annual rate of 3.3 percent in the third quarter of 2017 (table 1), according to the "second" estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP increased 3.1 percent.
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, the increase in real GDP was 3.0 percent. With this second estimate for the third quarter, the general picture of economic growth remains the same; nonresidential fixed investment, state and local government spending, and private inventory investment were revised up from the prior estimate (see "Updates to GDP" on page 2). [more here]
Let's take a closer look at the contributions of GDP of the four major subcomponents. The 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, it uses Table 2: Contributions to Percent Change in Real Gross Domestic Product.
Note: The conventional practice is to round GDP to one decimal place, the latest at 3.3%. The GDP in the chart above is the real GDP calculated to two decimal places.
Here is a chart of the latest estimates.
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 usually been positive, and vice versa. In the latest GDP data, the contribution of PCE came at 1.60 of the 3.30 real GDP, a decrease over the previous quarter and a positive contribution to Q3 GDP.
Gross Private Domestic Investment was a small positive contributor.
Net Exports was positive in Q3 but was a fractional contribution.
Government Consumption Expenditures came in slightly negative.
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. To one decimal place, the latest ratio of 69.5% is just below its record high. From a theoretical perspective, there is a point at which personal consumption as a percent of GDP can't really go any higher. We may be approaching that upper range.
Let's close with a look at the inverse behavior of three of the GPDI components during recessions. PCE and especially GC generally increase as a percent of GDP whereas GPDI declines. Note the three with different vertical axes (Personal Consumption Expenditures on the left, Gross Private Domestic Investment and Government Consumption on the right) to highlight the frequent inverse correlations.