More on Gross Purchases (and China)

In response to my post Why Does it Feel Worse than Reported?, a reader asked for a follow up chart:

What would be helpful here is a NET figure (& chart, of course) showing the shift (gross & per capita) from production surplus to consumption surplus. It's a little hard to read between the lines (literally) in this graphic.

The difference between GDP (what the U.S. produces) and Gross Domestic Purchases (what the U.S. purchases) is net exports. Thus, the charting is easy, but the result of the chart is rather astounding. The net level of purchases over production peaked at more than $2500 per person (that is literally $2500+ in a single year for every man, woman, and child within the U.S.) in September '06. This has "collapsed" to "only" $1150 a head, but that $1350 less that each person in the U.S. has been able to purchase (without producing) is a real decline.



So where does that leave us? It leaves us with entire generations (starting with the baby boomers) that believe it is the norm to purchase more than one produces. And why not? We have been able to follow this path (with the exception of the Volcker induced recession in the early 1980's) going on 60+ years.

But as the chart above shows, the scale of this excess purchasing in the early part of this decade was without precedent, which results in the below chart. The below chart details the cumulative real purchases that have been made over that 60 year window above and beyond what was produced in this nation. Resulting from an easy money policy, plus China dollar recycling (they produce, we finance) this cumulative level of real purchases made since 1949 spiked from $3 trillion in the late 1990's to $9 trillion in 2005$ by early 2008 (tripled in ~10 years).



Note in the first chart that every previous peak resulted in a reversion and this latest period was no exception. As a base case I would suspect a continued reversion in the top chart (i.e. net imports moving to zero), but what happens if the below chart mean reverts (we actually begin producing more and purchasing less) as well?

For one... more pain for the U.S. consumer, but a second result was recently outlined by perma-bear James Chanos:

“The Chinese,” he warned in an interview in November with Politico.com, “are in danger of producing huge quantities of goods and products that they will be unable to sell.”

We shall see...

Source: BEA

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, et.al.

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