Concentrate on Q1:2023 Real Personal Consumption Expenditures Instead of Real GDP?
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The Bureau of Economic Analysis’s first guess at real GDP annualized growth in Q1:2023 was a paltry 1.1%. Bear in mind that the BEA does not yet have March 2023 data for business inventories, net exports or construction expenditures. With only full January and February inventories data, the estimated change in real business inventories in Q1 “contributed” minus 2.3% to the annualized percent change in Q1 real GDP. Who knows, perhaps the March inventories data will reduce the magnitude of the drag on real GDP growth from this component.
In contrast to the drag on Q1 real GDP growth from real business inventories, real Personal Consumption Expenditures (PCE) contributed 2.5% to Q1 annualized real GDP growth. At an annualized rate, Q1 real PCE increased 3.7% versus 1.0% in Q4:2022 and the fastest growth in real PCE since the 12.1% recorded in Q2:2021. Given that real PCE accounted for around 71% of real GDP in Q1, the economy seemingly was on fire in Q1, right?
Wrong! Let’s take a look at the behavior of monthly real PCE as compared to its quarterly average. This is shown in Chart 1 below. The blue bars in Chart 1 represent the month-to-month annualized percent changes in real PCE. The red bars represent the quarter-to-quarter annualized percent changes in real PCE. So, the annualized growth of 3.7% in real PCE in Q1:2023 was the result of the outsized 17.6% annualized growth in January 2023 PCE growth. Monthly real PCE contracted in February and March 2023. In fact, real PCE contracted in four of the past five months. It seemed as though a myriad of measures of economic activity were very strong in January, very strong, as a former president might say. Could it have been that January 2023 was uncharacteristically warm?
Chart 1
Another “January 2023” effect possibly influenced the annualized percent change in the quarterly average of the PCE Chain Price Index. This measure of consumer inflation grew at an annualized rate of 4.2% in Q1:2023, up from 3.7% in Q4:2022. Oh my, consumer price inflation is accelerating, right? Wrong, if you look at the monthly pattern rather than the quarterly average one. Plotted in Chart 2 are the annualized percent changes in the PCE Chain Price Index. The blue-speckled bars represent the month-to-month percent changes. The red bars represent the quarterly average-to-quarterly average percent changes. In January 2023, the monthly measure of the price index soared to annualized rate of 7.5%. But in February and March, the annualized percent changes in the price index slowed to 3.7% and 0.9%, respectively. A plot of monthly and quarterly annualized percent changes in PCE Chain Price Index for services excluding energy and housing, Fed Chairman Powell’s current favorite measure of consumer price inflation is shown in Chart 3. The data follow a similar pattern to those in Chart 2 – a spike in January 2023 followed by significant slowing in February and March inflation rates.
Chart 2
Chart 3
Regardless of the fact that the paces of US real economic activity and consumer price inflation are slowing dramatically and that they are likely to trend slower in the coming months because of the lagged effects of the Fed’s prior tightening of monetary policy, however you choose to measure it, along with the coming restrictive effects of bank lending terms, Powell & Co. will hike the federal funds rate another 25 basis points on May 3. (How’s that for a long sentence?) In the grand scheme of things, it hardly matters. The recession has begun this current quarter. Will Congress and the Biden administration exacerbate the recession and wreak havoc on the financial markets this summer by failing to reach a compromise on raising the idiotic public-debt ceiling?
Paul L. Kasriel
AuthorMore in Author Profile »Mr. Kasriel is founder of Econtrarian, LLC, an economic-analysis consulting firm. Paul’s economic commentaries can be read on his blog, The Econtrarian. After 25 years of employment at The Northern Trust Company of Chicago, Paul retired from the chief economist position at the end of April 2012. Prior to joining The Northern Trust Company in August 1986, Paul was on the official staff of the Federal Reserve Bank of Chicago in the economic research department. Paul is a recipient of the annual Lawrence R. Klein award for the most accurate economic forecast over a four-year period among the approximately 50 participants in the Blue Chip Economic Indicators forecast survey. In January 2009, both The Wall Street Journal and Forbes cited Paul as one of the few economists who identified early on the formation of the housing bubble and the economic and financial market havoc that would ensue after the bubble inevitably burst. Under Paul’s leadership, The Northern Trust’s economic website was ranked in the top ten “most interesting” by The Wall Street Journal. Paul is the co-author of a book entitled Seven Indicators That Move Markets (McGraw-Hill, 2002). Paul resides on the beautiful peninsula of Door County, Wisconsin where he sails his salty 1967 Pearson Commander 26, sings in a community choir and struggles to learn how to play the bass guitar (actually the bass ukulele). Paul can be contacted by email at econtrarian@gmail.com or by telephone at 1-920-559-0375.
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