Visualizing GDP: A Look Inside The Q1 Third Estimate

Note: The charts in this commentary have been updated to include the Q1 2015 Third Estimate.

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 decrease in real GDP in the first quarter primarily reflected negative contributions from exports, nonresidential fixed investment, and state and local government spending that were partly offset by positive contributions from PCE, private inventory investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

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 -0.2. The -0.17 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 1.43 of the -0.75 real GDP. This is up slightly from the 1.23 of the Second Estimate but a substantial decrease from 2.98 in the previous quarter.

The contribution from Gross Private Domestic Investment has trended downward for the last four quarters.

The plunge over the last two quarters of Net Exports, not surprisingly given the dollar strength, was a major GDP drag.

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.

Here is a comparison of the Advance, Second and Third Estimates of Q1 GDP, which enables us to see the direction of the revisions.

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 latest ratio is 68.7% is an all-time high, fractionally above the previous high 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 Domestic Investment (GPDI) during recessions. PCE generally increases as a percent of GDP whereas GPDI declines. That is not what we've been seeing in recent quarters. Note the two with different vertical axes (PCE on left, GPDI on the right) to highlight the frequent inverse correlation.

The First Estimate for Q2 GDP will published on July 30.