While last week GDP growth came in better than expected at 3.5%, which was a very welcome development, there was very little change in the coverall shape of GDP. This is a troubling development for the long term.
GDP is the sum of spending by the Consumer, Private Investment, Government Spending and Net Exports. The Graph below shows the percentage each of them has contributed to overall GDP since 1947.
The Consumer is still by far the dominate force in the economy, and it is becoming more so. In the 3Q, PCE, meaning the consumer, rose to 70.98% of GDP, up from 70.66% in the second quarter. That is an all-time record high. At the same time, private investment was virtually unchanged near an all-time low as a share of GDP at 11.04%, up from 11.03% in the 2Q.
Government spending as a share of GDP actually declined slightly to 20.68% from 20.70%. Net Exports deteriorated to -2.71% from -2.40%.
While the Consumer has always been the biggest share of GDP, it has not always been so dominant. Back in the 1960's it averaged only 61.83% of the economy, or more than 9 full percentage points less as a share of the economy. The other three parts of GDP were all correspondingly higher, with the biggest differences being in Investment (4.45% percentage points) and net exports (3.33 percentage points). Government's share of the economy was just 1.37% higher than it was in the 3Q.
The decline in Investment's share of GDP is extremely disturbing, and the drop in net exports is a little disconcerting. We have made significant progress over the last year in reducing the net export drag, and the backsliding is not welcome news. The decline in investment is even more disturbing when you consider that it was residential investment that was responsible for the slight uptick as it increased at a 23.4% annual rate (from a record low level of 2.44% to a still extremely low 2.52%). Non-Residential fixed investment dropped to 9.55% of GDP from 9.84%).
Inventory investment is also included in the Investment numbers, which is why those two add to 12.07%, not to 11.04%, as inventory investment was negative in the 3Q, just not as negative as it was in the 2Q. Thus it actually contributed to GDP growth in the quarter. But housing is not exactly something in short supply in the U.S. right now. It is not the sort of investment that creates lots of cash flows for the repayment of debt, and it does not spur innovation; it is not the sort of investment that leads to further growth.
As shown in the table below, Investment has averaged 15.53% of GDP in the post-war period. Prior to the current downturn, the lowest share of the economy it ever reached was 12.77%, in the second quarter of 1949.
