One of the risks with short term data points is being fooled by their randomness. I believe the US economic engine is slowing down and that weight of the past remains a significant head wind!
A number superlatives are cropping up re final Q3 GDP numbers:”fastest pace since Q3 2003” and others…
But what of the frame? If we look at the average increase in real GDP over the last 4 quarters (average change in GDP over 4Qs/average GDP in prior 4 quarters) we see that real GDP growth is relatively low in an historical context and it is unclear whether the current trend is either a bounce back from earlier weakness or a position of growing strength.
Importantly private consumption expenditure is still outsized with respect to economic growth and other important items such as machinery and equipment expenditure. That is much of the growth in GDP to date has been due to growth in personal consumption expenditures:
A lot of this differential came about during a period of significant growth in consumer debt, from the late 1990s onwards especially.
In fact, if we adjust for increases in consumer credit and inventories and look at average quarterly increases over the last 4 quarters (rolling) we see a more muted picture. Yes, there has been an increase in growth above the trend seen since early 2001, but it is just a point.
And on a longer term profile:
This is not a recovery of trend, but growth within a constrained growth dynamic. We would need to see yet stronger growth. Note that consumer credit growth, most likely aligned with consumption expenditures, has been rising fairly strongly of late (I have mentioned this in previous posts).
And if we want to look at the historical relationship between income growth and personal consumption expenditures we find that consumption is outpacing income growth by a significant margin and you have to question this relationship given high debt levels and demographic headwinds:
Clearly even today’s meagre recovery depends on borrowing to support personal consumption expenditure. A recent blog on constrained consumer dynamics looked at these issues.
But, we can look into the detail of recent economic growth and realise (as I have said before) just how important demand for cars and recreational vehicles has been. :
And the growth rate of demand for MVPs and RVs relative to PCE is also significant:
But the magnitude of the importance of MVPs and RVs relative to the growth of personal consumption expenditures is noteworthy if we look at it in an historical context: between 2004 and 2008, over rolling 3 year periods, this expenditure rarely went above 10% of PCE, post 2011 it has rarely been below 25%.
Non durable goods consumption on the other hand has been deteriorating:
And while capex has been rising you have to ask yourself of its reliance on car and vehicle production (and non revolving credit growth) and oil and gas investment (the impact of the oil price).
That said, gross fixed capital investment expenditures do not seem to be bounding away while higher levels seem to be more a product of synchronised growth than any large increase in any one component:
And I believe that financial services is still too large with respect to the economy and recent growth is also likely a factor of quantitative easing:
Recent growth has also benefitted from a downturn in imports:
Personally, I feel that the economy has been stuck in a rut since the late 1990s: the amount PCE in nominal terms appears to have hit some sort of structural ceiling and the following is a chart I have featured for some time:
And the real picture goes further back:
Things are slowing down at the same time as growth has become overly dependent on consumption. The following chart shows the change in quarterly real PCE as a % of GDP and the green line, the smoothed 4Q change as a % of GDP. The economy is slowing down:
But commercial bank deposit growth continues to expand at a higher rate than nominal GDP and is likely due to the asset focus of deposit expansion through QE activities:
This last chart I will leave for another post!!!!!!