An Inside Look at the Q2 2023 GDP Second Estimate
Real gross domestic product (GDP) is comprised of four major subcomponents: personal consumption expenditures, gross private domestic investment, net exports, and government consumption expenditures. In the latest Q2 2023 second estimate update it was reported that real GDP increased at an annual rate of 2.1%. Three out of the four components made positive contributions and one component made negative contributions.
Personal consumption expenditures (PCE) contributed 1.14, government consumption expenditures (GCE) contributed 0.58, and gross private domestic investment (GPDI) contributed 0.57 to the Q2 real GDP. Net exports of goods and services (NEGS) was the sole negative contributor in Q2 at -0.22.
Over time, the personal consumption expenditures (PCE) component has shown the most consistent correlation with real GDP. When PCE has been positive, GDP has usually been positive, and vice versa (although this was not the case in Q1 and Q2 2022).
The accompanying chart is a way to visualize real gross domestic product (GDP) change since 2007. The chart uses stacked columns 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. 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.
Here is the same chart but only showing the latest two years. By removing the COVID outliers, we can get a clearer picture of each components' most recent contributions.
Components as a Percent of Real GDP
Here is the latest break down of the components as a percent of real GDP:
As for the role of 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 data in 1947. To two decimal places, the latest ratio of 70.73% is just below its peak of 70.87% reached in Q2 2022.
GDP Components and Recessions
Let's close with a look at the inverse behavior of the four GDP components during recessions. PCE and GPDI generally increase as a percent of GDP, whereas GCE and NEGS decline. Note the different vertical axes (PCE on the left, GDPI, GCE, and NEGS on the right) to highlight the frequent inverse correlations.
This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at VettaFi | Advisor Perspectives
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