An Inside Look At The GDP Q2 Second Estimate - Saturday, Aug. 29

The chart below is a way to visualize real GDP change since 2007 and uses a stacked column chart to segment the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself. Here is the latest overview from the Bureau of Labor Statistics:

"Real gross domestic product (GDP) decreased at an annual rate of 31.7 percent in the second quarter of 2020 (table 1), according to the 'second' estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP decreased 5.0 percent.

"The GDP estimate released today is based on more complete source data than were available for the 'advance' estimate issued last month. In the advance estimate, the decrease in real GDP was 32.9 percent. With the second estimate, private inventory investment and personal consumption expenditures (PCE) decreased less than previously estimated (see 'Updates to GDP' on page 2).

"Coronavirus (COVID-19) Impact on the Second-Quarter 2020 GDP Estimate
The decline in second quarter GDP reflected the response to COVID-19, as 'stay-at-home' orders issued in March and April were partially lifted in some areas of the country in May and June, and government pandemic assistance payments were distributed to households and businesses.

"This led to rapid shifts in activity, as businesses and schools continued remote work and consumers and businesses canceled, restricted, or redirected their spending. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the second quarter of 2020 because the impacts are generally embedded in source data and cannot be separately identified. For more information, see the Technical Note."

Let's take a closer look at the contributions of GDP of the four major sub-components. The data source for this chart is the Excel file accompanying the BEA's latest GDP news release. Specifically, it uses Table 2: Contributions to Percent Change in Real Gross Domestic Product.

(Note: The conventional practice is to round GDP to one decimal place, the latest at -31.7%.)

Here is a chart of the latest estimates.

Over the time frame of this chart, the Personal Consumption Expenditures (PCE) component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has usually been positive, and vice versa. In the latest GDP data, the contribution of PCE came at -24.76 of the -31.7 real GDP, an increase from the previous revision and the most negative contribution to Q2 GDP.

Gross Private Domestic Investment was a negative contributor. Net Exports were positive in Q1. Government Consumption Expenditures came in as a minor positive contributor.

Here's a helpful look at the components of GDP and how they are distributed for the Q2 Second estimate.

As for the role of Personal Consumption Expenditures (PCE) in GDP and how it has increased over time, here is a snapshot of the PCE-to-GDP ratio since the inception of quarterly GDP in 1947. To one decimal place, the latest ratio of 68.6% is below its record high and still above the levels during the last recession.

Let's close with a look at the inverse behavior of three of the GPDI components during recessions. PCE and especially GC generally increase as a percent of GDP whereas GPDI declines. Note the three with different vertical axes (Personal Consumption Expenditures on the left, Gross Private Domestic Investment, and Government Consumption on the right) to highlight the frequent inverse correlations.