The durability of consumption and economic growth

The Bureau of Economic Analysis today released data on the U.S. gross domestic product that estimates GDP grew by 4 percent on an annualized basis during the second quarter of 2014. This estimate beat most economists’ expectations of an increase of about 3 percent. Yet, as always, the number is the first of three estimates in the coming months and is subject to revisions, so it should be interpreted with caution.

The largest contributor to GDP growth in the second quarter was gross private domestic investment, comprised of spending on final goods and services to aid in future production. Private investment added 2.57 percentage points to the total growth rate, though 1.66 percentage points of that contribution was an increase in private inventories. In short, more than half of the increase came from goods businesses produced but did not sell during the quarter.

Government expenditures and investment added 0.30 percentage points to the rate, with state and local government expenditures driving all of the growth. Net exports of goods and services were a drag on growth, subtracting 0.61 percentage points from the quarterly growth rate.

Personal consumption expenditures added 1.69 percentage points to the total growth rate. The majority of the growth came from the consumption of durable goods—think cars and household furnishings—at 0.99 percentage points. During the second quarter, the total amount of consumption of durable goods increased by 14 percent, nondurable goods by 2.5 percent, and services by 0.7 percent. The relative importance of durable goods compared to the consumption of nondurable goods and of services, such as food and clothing, and healthcare and transportation, respectively, during this past quarter is a continuation of a recovery-long trend since the end of the Great Recession in June 2009.

Looking from the end of the Great Recession, we can see that consumption of durable goods has been much stronger than consumption of nondurable goods and services and in line with historical trends. Over this time period, the inflation-adjustment amount of durable goods consumption increased 26.6 percent. For nondurable goods, it only increased by 5.5 percent and for services 5.1 percent. As economists Atif Mian and Amir Sufi point out on their blog, consumption of nondurable goods and services have been historically weak during this recovery.

The lack of growth in nondurable consumption provides some context to the recent merger of discount retailers Dollar Tree and Family Dollar. And the importance of durable goods consumption to the growth of overall consumption should be considered when we read stories about a subprime boom in used car loans.

While the economic recovery continues, understanding the sources of our current economic growth is vital. After the Great Recession, economists and analysts have been concerned about the pace of short-term and long-term economic growth. A deeper appreciation of what has been driving growth recently and over the course of the post-war era can help shed light on the path forward.

July 30, 2014

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Disaggregating Growth

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