Posted by Marcelo Perez

The revised 4th Quarter GDP number was released a couple of weeks ago, highlighting a 6.2% decline in total goods and services produced in the US, which included a 4.3% drop in consumer spending, the most in 28 years. Considering the fact that most economists feel that the first quarter of 2009 will be worse than the last in terms of spending, and that consumer spending accounts for almost 70% of GDP, that got us thinking:

How severe, in real inflation-adjusted terms, was this drop in consumer spending compared to other recessions? How will this new downward trend in spending, which is only supposed to get worse in the 1st quarter, affect GDP growth in that quarter? And will the economic downturn be as drastic as predicted in this coming quarter?

Well, we compiled some data from the Bureau of Economic Analysis and came up with this. Presented here is a historical comparison between Personal Consumption Expenditures (consumer spending) and Gross Domestic Product over a 40-year time frame. Click on the chart for an expanded view. 

So, based on this historical perspective, we are looking at a 4th quarter that rivaled the severe double dip recessions of 1980 and1982. Pretty harsh, yes, but some economists are calling for a worse 1st quarter of 2009. That’s pretty hard to believe, considering that the PCE actually rose in January, by 0.4%, and that retail sales have outpaced expectations to the upside in the last 2 months. Retail sales account for 1/2 of consumer spending and 1/3 of GDP, so upward surprises in January and February mean alot.

In the 4th quarter, when consumer spending plunged 4.3%, it subtracted three percentage points from GDP. Now, despite the fact that the PCE is up 0.4% so far, let’s just say that consumer spending will fall by half of what it did in the last quarter, 2.1%. That in essence would subtract just 1.5 percentage points from GDP. And that’s only plausible if consumer spending falls off a cliff in March, as January and February were much better than expected. It seems more and more likely that, although there are various components that make up GDP, it won’t be as bad as the 5.2% decline expected by many. We may be headed for a pleasant surprise when the preliminary 1st quarter GDP report comes out in May.

GDP Estimate: 2%-3% Decline

See Raw Data (Excel File).