Did you know that personal consumption expenditures (PCE) never declined during the 2001 recession? It was a surprise to me when I assembled an extended "GDP Constructed" chart. See below.
This time around, forward-looking consumers appear to anticipate a severe drop in their future wealth and possibly income. As my macro source says, "Bad, bad news." The sharp drop in Q3 2008 consumption as a component of growth sticks out (rather, down) quiteabnormally, and recent history suggests it is. Just another reason to anticipate a much tougher recession in 2009 than recent memory.
DiCecio and Gascon, researchers at the St. Louis Fed, say this:
All recessions since the early 1950s, except the one in 2001, included a contraction in personal consumption expenditures (PCE). Because roughly 70 percent of the country’s GDP can be attributed to PCE on goods and services, any contraction in consumption expenditures weighs heavily on economic growth.
Even though growthology.org readers know that consumption is a poor measure of long-term growth potential (for that, we have to look at production), it is undeniably a barometer of short-term growth. Thus the Fed scholars note that we can look at upcoming monthly data from BEA with more attention than normal:
Unlike the other components, PCE estimates are also released monthly as part of the BEA’s “Personal Income and Outlays” report.
My concern: Policymakers need to be very, very careful not to make this situation worse by killing off productivity growth. The recession will be ugly, but remember that economic growth occurs naturally if you don't suffocate your economy in bubble wrap. Every effort to cushion workers, bail out failing firms, and "stabilize" prices will gum up the wheels of progress. Permanently.
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Menzie Chinn at Econbrowser has a very interesting analysis of cosumption trends. Durables consumption is much lower than services consumption as a percentage of GDP. Relative prices of durables have grown slower relatively, even as consumption of durables has grown faster, again relatively. This seems relevant to the "future of jobs" meme. In any case, Menzie's analysis is preliminary and worth watching. As the man says, do check out the charts!
I'm trying to fit some regressions now, to make some guesses about how consumption will move in the future, based on guesses about GDP and net wealth. I haven't got very far, but at the very least, I can share some interesting pictures.
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