The missing GDP, updated

Credit Suisse economists have updated their “Missing GDP” chart (prior edition here), now showing the average contribution to real GDP growth of each subcomponent in the first thirteen quarters of the last six US recoveries, and then comparing them against the corresponding contributions in this one.

The three big notable differences between this recovery and the prior six are the smaller contributions of consumer spending (especially on services), residential investment, and the government.

This is a recession and recovery following a financial crisis that itself was preceded by a home price and mortgage credit bubble, so the smaller contributions of the first two items might not be so surprising, especially given how slowly employment has also recovered.

As for the public sector, overall the federal government has actually kept pace with its contributions in the past, meaning that nearly all of the relative shortfall has come from state and local governments, with the Feds failing to pick up the slack (either directly with more aid to the states or just making up for it with more spending and investment of its own).

The rebound in business investment is close to its average, and exports have played a helpfully bigger role.

More recently, it seems that some of this recovery’s trends have been starting to shift. This should be taken cautiously, as quarterly GDP numbers can be revised quite dramatically later on. And the first readings, like last Friday’s for third quarter GDP, aren’t accompanied by the first GDI estimate, which is often more accurate.

So it’s all tentative, but… It seems business investment and exports have started to play a smaller role amid signs of slowing global growth, while consumer spending and residential investment are helping more.

This makes a certain amount of sense, as the bottoming of housing activity should mean both that households are more confident spending their money (as the value of their assets stabilises) and that residential investment will continue to contribute positively. Some comments from Calculated Risk:

The key story is that residential investment is continuing to increase, and I expect this to continue (although the recovery in RI will be sluggish compared to previous recoveries). Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2013 (with the usual caveats about Europe and policy errors in the US).

Recently both the consumer spending and consumer confidence indicators have been encouraging, though we should note that some economists have worried that the uptick in spending won’t be sustainable because private-sector wage and salary growth has been flat and some of the spending has therefore come out of savings. Against this are the bottoming of housing activity, pent-up demand for durables that are coming to the end of their depreciation cycle, and a gradually opening credit channel (especially auto lending) for everything but mortgages. The recent trends in monetary policy are beyond the scope of this post but are, we think, pointing in the right direction and will help.

As for the role of government, it seems that state and local government contraction has ended, but as we noted earlier the federal contraction has already started and is set to continue, even if the entire fiscal cliff is averted (which it probably won’t be):

Related link:
The missing GDP – FT Alphaville