Note: (March 5, 2010)
The Real PCE data used in the original USA_Update of May 2, 2007
has been revised downward substantially by the annual revision
issued on July 28, 2007 from Bureau of Economic Analysis. The
revised data up to the middle of 2009, along with the data before
the revision, are presented in the graph at the right. It was the
substantial downward revision of the growth rate of Real PCE
starting from early 2007, and the downward revision of the growth
rate of Real GDP in the same annual revision that had prompted us
to issue a "recession watch" on July 28, 2007. This is also consistent with
the long term projection made near the end of Comment 25 of October 18, 2005
that says, ".., so if an economic recession shoud come, it will be in 2008,...".
The growth rate of the real GDP of the 4-th quarter of 2006, after substantial downward revisions, has settled at annualized rate of +2.5%, and the growth rate of the real GDP in the first quarter of 2007 has been reported as +1.5%. Those lackluster performances of GDP are due to sharply lower residential constructions, known as the residential fixed asset investment in the GDP report. Also adding to the misery is the stagnation of private business investments, called the non-residential fixed asset investments. However, the major factor of GDP, the personal consumption expenditure is holding up fine. In the graph at the right monthly values of the real personal consumption expenditure (consumer spending in short) and the real personal consumption expenditure less food and energy are plotted in logarithmic scales respectively. The growth rate of the overall real personal consumption expenditure has slowed slightly starting from the latter half of 2005 as manifested in the transition from the trend line A to the trend line B, and so is the growth rate of the real personal consumption expenditure less food and energy as indicated by the transition from the trend line a to the trend line b. Recent data of March 2007 indicates that neither the slower trend of line B nor the trend of line b is violated. If the residential constructions level off, the reasonably strong personal consumption expenditure will push the growth rate of real GDP back to above +2.5%. As long as consumer spending holds up, it is difficult for the US economy to slide into a recession.
Many anticipate that the US consumer spending will be curbed due to the sub-prime and other mortgage woes. In the March report of consumer spending the real personal consumption expenditure fell slightly whereas the price index excluding food and energy, called PCE-core price index, hardly grew at all. The bond market hailed the report and took down the yield on long-term US treasuries by quite a few base-points, thinking that the long awaited slowdown of consumer spending and a tame inflation have finally arrived, and as the consequence FED will lower interest rates soon. However, a close inspection of the report reveals clear discrepancies from the bond market's perception. In the next graph PCE price index and PCE-core price index are plotted in logarithmic scales respectively. Comparing this graph with the previous graph of personal consumption expenditures, we will see that the overall PCE price index has risen at an annual rate of +5.1% in the month, prompting a weak real personal consumption expenditure. On the other hand the real personal consumption expenditure less food and energy has risen more than 4% in annualized rate, thanks to the subdued PCE-core price index. The picture of consumer spending in March is as follows: US consumers has cut back the real spending on food and energy due to higher prices on those items, but has spent liberally on things other than food and energy. Therefore, the spending slowdown of March has nothing to do with sub-prime woes but is due to the sudden spur of food and energy prices. It has been pointed out in Comment 30 that the core CPI index lags the overall CPI index by 6 months to 1 year (please also see the updated chart of year to year comparisons of CPI and CPI-core indeces). PCE-core price index is also entering a quieter period, reflecting the sharp fall of oil prices in September 2006 and January 2007, but will edge up again at the end of 2007. It is highly doubtful that there is any room for FED to lower short-term interest rates at this juncture. Furthermore, as discussed in Comment 42, FED has already lost a substantial amount of autonomy due to the outsize holdings of US dollars in the hands of foreign governments, the natural result of the runaway US trade deficits. If FED is willing to lower the short-term interest rates, Japanese government then must prepare to buy up a tremendous amount of dollars, much more than 400 billion dollars that it spent last time in such a dollar buying frenzy in order to prevent a catastrophic collapse of US Dollar.