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Thursday, January 7, 2010

Why Does It Feel Worse than Reported?

Gross Domestic Purchases are (per Babylon):

The market value of goods and services purchased by U.S. residents, regardless of where those goods and services were produced. It is gross domestic product (GDP) minus net exports of goods and services. Equivalently, it is the sum of personal consumption expenditures (PCE), gross private domestic investment, and government consumption expenditures and gross investment.
dblywo (with patience) detailed the divergence between GDP and Gross Domestic Purchases in recent years, commenting:
For 4-5 decades they tracked closely, especially on a YoY basis but started diverging in the last five years. I find that GDPx is much more useful right now for linking to PCE, Employment,
And here is a chart showing the five year annualized change in both GDP and Gross Domestic Purchases.

So what does this show us?

It shows that consumption over the years leading up to the crisis grew much faster than what we actually produced. This, was never sustainable. In addition, the further one moves down this path, the more difficult it becomes to grow off of this higher / boosted base. As a result, in the recent period growth in purchases has not been able to keep up with the growth seen in the headline GDP figure, even though net exports have remained negative (i.e. we still consume more than we produce, just not the larger level needed to maintain growth). Putting numbers to this, GDP has grown at a bit more than 1% annualized over the past five years, whereas growth in Gross Domestic Purchases over that period was only 0.5% annualized (low and lower).

So what does this mean?

It means that we became accustomed to living beyond our means, irrelevant of the actual production that was created within the confines of any GDP figure. This is one of the reasons that the recent GDP figures have not reflected what has actually been felt by each of us... the recent economic decline has in fact felt much worse.

The below chart makes this more clear. It is a chart similar to the one shown above, but is on a per capita basis.

As one can see, Gross Domestic Purchases per capita (i.e. GDP less net exports) is now less than it was FIVE years earlier... the first time this has happened since at least WWII.

Source: BEA