- Overall, PCE (Personal Consumption Expenditure) constitutes 71% of GDP. This is a chicken and egg problem. PCE will not improve unless unemployment comes down, and businesses will not start hiring unless they see an improved economy.
- Out of 5.7% annual growth, Change in Inventories contributed almost 3.39 percentage points, or roughly 60% to the overall growth. While a lot of economic experts and pundits do not think this as a real growth driver for obvious reasons and I tend to agree with them, but I am also cautiously optimistic that this trend and growth in inventories lead to businesses confidence and may lead to hiring of workers, which can then led to higher PCE, thus breaking the chicken-egg problem. Also, noteworthy is the fact that despite a 60% contribution to overall GDP growth, the inventories actually fell a further $40bn in the quarter.But the drop in this quarter was much less than the record liquidations that happened in Q3 2009. This suggests me that there is a lot of scope for inventory restocking and that the change in inventories might still continue to add positive momentum to Q1 and Q2 2010 GDPs.
- Within the PCE Goods contribution of 11% to the growth, most of the growth is coming from Non-durable goods such as food, beverages, clothing etc. Durable goods consumption such as motor vehicles dropped from Q3. Motor Vehicles consumption was expected to see a drop because of the much criticized but extremely successful "cash for clunkers" program. Motor Vehicles and parts contributed 0.81 percentage points to the 2.2% growth in Q3, while it subtracted 0.57 percentage points from the 5.7% GDP growth in Q4. Assuming Cash for clunkers borrowed sales from Q4 into Q3, this event led to a drop in Q4 GDP. .If not for cash for clunkers, Q4 GDP would have grown by 6.3% assuming no change in motor vehicles consumption from Q3 to Q4.
More analysis on the report later..
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