Visualizing GDP: An Inside Look at the Q4 Advance Estimate
Note: The charts in this commentary have been updated to include the Q4 2016 Advance Estimate released this 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:
The deceleration in real GDP in the fourth quarter reflected a downturn in exports, an acceleration in imports, a deceleration in PCE, and a downturn in federal government spending that were partly offset by an upturn in residential fixed investment, an acceleration in private inventory investment, an upturn in state and local government spending, and an acceleration in nonresidential fixed investment. [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 1.9%. The GDP in the chart above is the real GDP calculated to two decimal places.
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 1.70 of the 1.87 real GDP, a decline over the previous quarter.
The contribution from Gross Private Domestic Investment essentially canceled out PCE.
Net Exports, which is largely impacted by fluctuations in Dollar strength, made its largest contribution since Q4 of 2013. Government expenditures were fractionally positive.
Government Consumption Expenditures increased slightly in its contribution.
Here is a look at the contribution changes between over the past four quarters. The difference between the two rightmost columns was addressed in the BEA's GDP summary quoted above.
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 69.2% is a slightly off its 69.3% record high in Q2. 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.