The bar chart below shows the percentage contribution that each component makes up of the master component. As you can see PCE makes up more than 70% of the economy. This is why paying attention to the consumer will tell you all you need to know about the long term direction of the economy.
Service made up more than 45% of total PCE in the 1st quarter. For all of the hype about the how the “housing boom” is going to save the economy – well that was a whopping 2.89% of the total, which in reality, barely moves the needle.
The real concern about economic growth overall is that the annual growth
rate of “real,” or inflation adjusted, GDP has fallen below the 2% growth rate
for the past two quarters.
There are two important points to note from this. The first is that GDP growth appears to have peaked for the current economic cycle. Secondly, historically speaking, when the annual growth rate has fallen below 2% it has generally been within the context of the onset of recession.
GDP did dip below the 2% growth rate in 2011, however, due to a combination of natural events consisting of a drop in oil prices, a plunge in gasoline prices, the warmest winter in 65 years which lower energy costs, a manufacturing restart post the Japanese earthquake and massive central bank interventions by the ECB and the Fed kept the economy from slipping into recession. The problem today is that outside of the Fed’s ongoing stimulus programs there are few other positive tailwinds pushing the economy.