Our last post showed the recovery in GDP since the Great Recession has been abysmal, and we argued that it is a mystery that requires some deep thought and additional research. Let’s go a bit further into the GDP data to try to figure out what is going on.
Breaking out the GDP components is always a bit tricky because they depend on one another. For example, business investment is a function of household consumption. If business investment is weak, it could be because consumption is weak. Nonetheless, there is some useful information when we break out where the GDP weakness comes from.
Ok, now for the charts.
Let’s start with the primary culprit: consumption of services and non-durable goods. They are shockingly weak relative to other recoveries.
Consumption of durable goods is actually doing fairly well, which may reflect aggressive monetary policy that has spurred borrowing especially in the auto market:
It’s still not great, but it looks quite a bit better than consumption of services and non-durable goods.
Many point to weakness in residential investment as the primary culprit. It looks pretty bad, but there are other recessions that had comparably slow growth in residential investment after the recession.
Non-residential investment is a bit tricky, because it is almost a direct function of expected household demand for goods and services. If no one is buying a company’s products, then of course they aren’t going to investment in equipment and structures! So we are not sure how much there is to learn here, but here is the chart:
It looks pretty weak, but again that shouldn’t be a surprise. In any case, it doesn’t look as weak as consumption of services and non-durable goods, which really stands out.
Finally, here is government expenditures and investment:
This one surprised us. Government expenditure and investment have definitely been a drag recently, but they don’t stand out as much as the weakness in consumption in services and non-durables.
Let us repeat: this type of exercise is tricky because all of these components are a function of the other ones — the macro-economy cannot be neatly divided into parts. But there is some valuable information here. The mystery of weak GDP growth over the past 6 years is closely related to consumption, particularly consumption of services and non-durable goods.