Visualizing GDP: Dissecting the Second
Estimate Downward Revision
February 28, 2014
Note from dshort: The charts in this commentary have been updated to include the Q4 2013 Second Estimate.
The chart below is my way to visualize real GDP change since 2007. I've used 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 increase in real GDP in the fourth quarter primarily reflected positive contributions from PCE, exports, nonresidential fixed investment, and private inventory investment that were partly offset by negative contributions from federal government spending, residential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP growth in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, and downturns in residential fixed investment and in state and local government spending that were partly offset by accelerations in exports, in PCE, and in nonresidential fixed investment and a deceleration in imports.
Let's take a closer look at the contributions of GDP of the four major subcomponents. My 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, I used Table 2: Contributions to Percent Change in Real Gross Domestic Product.
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 1.73 of the 2.28 real GDP. The Q4 contribution from PCE increased from Q3, but the Second Estimate is a downward revision from the 2.26 contribution in the Advance Estimate.
Note: The conventional practice is to round GDP to one decimal place, the latest at 2.4. The 2.38 GDP in the chart above is the real GDP calculated to two decimal places based on the BEA chained 2009 dollar data series.
To help us understand the Second Estimate revisions, here's a side-by-side look at the Advance and Second Estimate subcomponents. PCE was significantly trimmed in the Second Estimate, especially the Goods subcomponent, but it remains the largest contributor. Net Exports was also trimmed. Gross Private Domestic Investment increased, mostly in Fixed Investments.
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 GDP summary quoted above. I've added arrows to highlight the quarter-over-quarter change for the major components.
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. The Q4 2013 ratio is 67.9%, fractionally off the all-time high of 68.6% in Q1 2011. 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 hovering in that upper range.
Let's close with a look at the inverse behavior of PCE and Gross Private Investment (GPDI) during recessions (note my use of different vertical scales to facilitate the overlay). PCE generally increases as a percent of GDP whereas Private Investment declines. That is not what we're seeing in the current data. I've plotted the two with different vertical axes (PCE on left, GPDI on the right) to highlight the frequent inverse correlation.
I'll update these charts when the Q4 2013 Third Estimate is released next month.