Wednesday, November 5, 2008

A Closer Look At the Last 4 Quarters of GDP Growth

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The BEA breaks down GDP data into four subsets. Here is the list with the percentage each contributes to GDP growth:

1.) Personal consumption expenditures,
2.) Domestic investment,
3.) Exports/imports, and
4.) Government spending.

The last four quarters have not been good for the US. The annualized growth rate starting in the 4Q 2007 was: -.2, .9, 2.8 and -.3. The second quarter number was the result of a statistical fluke not real growth. Let's see what the chart says about this growth.

1.) Gross private domestic investment has consistently lowered GDP growth. This is largely the result of residential investment which has been a negative contributor since the first quarter of 2006. However, also note that non-residential investment in equipment and software has subtracted from growth for the last three quarters thanks to drops in industrial and transportation equipment. In other words, we're seeing a slowdown in some business investment as well.

2.) Personal consumption expenditures took a huge nosedive last quarter. This jibes with the record low consumer confidence number we're seeing along with the poor showing on the jobs front. Considering this sector is responsible for 70% of GDP growth a continued weak showing would seriously hurt growth.

3.) Government spending was very important last quarter. But notice that this was the highest contribution for the last four quarters. In other words, don't expect this trend to continue.

Now, let's ask a very important question: what are the possibilities that any of these categories will increase next quarter?

Consumer confidence is low, the job market is terrible and two main sources of personal wealth (stocks and real estate) are all dropping in price. Combine all of these factors and you get more low readings for PCEs/

The economy is slowing down domestically and internationally. That does not bode well for either domestic business investment or exports.

That leaves government spending to prop up the economy.