Wednesday, August 2, 2017

Consumer Spending – I’ll Bet that Q3 Real GDP Growth Will Be Closer to Q1’s than Q2’s

August 1, 2017

Consumer Spending – I’ll Bet that Q3 Real GDP Growth Will Be Closer to Q1’s than Q2’s

It’s too hot to go sailing today, so I thought I’d “unpack”, as the kids on cable news say, second quarter real GDP and real personal consumption growth (PCE). I will argue that the quarter-to-quarter acceleration in the growth of both second quarter real GDP and real PCE was due more to arithmetic than a fundamental acceleration in the growth of aggregate demand. To refresh your memory, real GDP annualized growth in the second quarter was 2.6% versus 1.2% in the first quarter. Real PCE growth annualized growth in the second quarter was 2.8% versus 1.9% in the first quarter.

Let’s take a look at the month-to-month annualized real PCE growth over the first six months of 2017 (see Chart 1). The median month-to-month annualized real PCE growth during this time period was a paltry 0.6%. The outlier during this period was March, when annualized real PCE growth was a whopping 9.2%. The annualized growth rate of real PCE in April, May and June were 0.20%, 2.20% and 0.45%, respectively. The three-month average of the annualized growth rates of real PCE for April, May and June was 1.15%, a far cry from the 2.8% annualized growth in the quarterly average level of real PCE.
Chart 1
It was the surge in real PCE growth at the end of the first quarter that boosted second-quarter real PCE growth. Plotted in Chart 2 are the monthly levels of seasonally-adjusted at annual rates of real PCE along with their three-month averages for the first six months of 2017. Let’s concentrate on the data points for March and June. The three-month averages of the PCE levels for March and June also are the first and second quarterly averages, respectively, of the levels of real PCE. If you do the arithmetic you will find the March level of real PCE was 0.49% higher than the average level of real PCE for the three months ended March or the first-quarter average level of real PCE. If the level of real PCE had simply remained at its March level in April, May and June, the second-quarter average level of real PCE would have been equal to that of the March level. In this case, annualized growth in second-quarter real PCE would have been 1.97% (1.0049 raised to the fourth power and so on and so forth). Because the March level of real PCE was so far above the first-quarter average, this biased upward the second-quarter average level of real PCE and thus, second-quarter annualized growth in real PCE. But what March giveth, June taketh away. The June level of real PCE was only 0.085% above the average level of real PCE for the three months ended June, or the second-quarter average. If the level of real PCE were to remain at the June level in July, August and September, then annualized growth in real PCE in the third quarter would be only 0.3%! So, while second-quarter annualized growth in real PCE started the quarter with a strong tailwind, third-quarter growth is starting with hardly any wind at its back. In order for annualized growth in third-quarter real PCE to match the second quarter’s 2.8% growth, the month-to-month annualized changes in real PCE would have to be about 1.2%, double that of the median month-to-month annualized percentage changes in the second quarter.
Chart 2
Real PCE contributed 1.9 percentage points to the second quarter’s 2.6% annualized growth in real GDP. If growth in real PCE slows in the third quarter, which quarterly-averaging arithmetic suggests it will, then growth in third-quarter real GDP is likely to slow, too. But there also is a fundamental reason why third-quarter real PCE growth is likely to slow – you guessed it, sluggish growth in thin-air credit. Plotted in Chart 3 are monthly observations of the behavior of the sum of bank credit and the monetary base. The bars are the year-over-year percent changes in monthly thin-air credit. The line traces the month-to-month annualized percent changes in thin-air credit. In June, the year-over-year percent change in thin-air credit was 2.6%, the slowest growth in 12 months. In June, thin-air credit contracted at an annualized rate of 0.4% versus May. Sluggish growth in thin-air credit is not the stuff of robust growth in consumer spending.
Chart 3
If the Fed does, in fact, begin paring its outright holdings of securities in September, then it had better start engaging in repurchase agreements. Otherwise the monetary base will shrink and, all else the same, there will be upward pressure on the federal funds rate. If the monetary base shrinks, thin-air credit growth will slow further unless there is an offsetting increase in bank credit. If thin-air credit growth slows further in the months ahead, investment-grade bond yields will fall more from their already-low levels – barring a Treasury default emanating from a failure to raise the federal government debt ceiling.

Lastly, my former Northern Trust colleague, Asha Bangalore, has announced her retirement. Her last day at Northern will be August 14. Asha joined me at Northern in 1994. Any success I might have had at Northern was, in large part, due to having Asha as a colleague. She was my “Radar” O’Reilly, knowing what we needed and obtaining it long before I even thought of it. I was always in awe of Asha’s time-management skills. Where as I am a congenital procrastinator, Asha immediately tackles any project regardless of how difficult or boring it might be. I was blessed to have had such a knowledgeable and capable colleague as Asha. Asha, best wishes as you enter this new phase of your life. Who knows, perhaps we can put the team together again if you get bored in retirement?

Paul L. Kasriel
Senior Economic and Investment Advisor

“For most of human history, it made good adaptive sense to be fearful and emphasize the negative; any mistake could be fatal”, Joost Swarte


  1. Professor: Followed you since my Northern Trust days. Have always enjoyed your work.

    Have you considered the advent of marketplace lending and firms like Square Capital (the firm that allows small businesses to swipe your credit card in their iPad, is now lending money to said small businesses while compiling all of their revenue date) in your analysis of "thin-air" credit? Or is marketplace/alternative lending "non-thin-air" credit?

      Are you looking for financial freedom? Are you in debt, you need a loan to start a new business? Or you collapse financially, do you need a loan to buy a car or a house? Have you ever been rejected by your bank in ever finance? You want to improve your financial? You need a loan to pay off your bills pay off? No more looking, we welcome you for an opportunity to get all types of loans at a very affordable 3% interest rate for others. For information, contact us now by email at: {}

      Do you have a bad credit? Do you need money to pay bills? Is it necessary to start a new business? Do you have an unfinished project due to poor funding? Do you need money to invest in any specialty that will benefit you? And you do not know what to do. We offer the following loans;both Personal loans [secure and unsecured], Business loans [secure and unsecured] ,combination loans ,Student loans,Consolidation loans and so many others.

      Company name: UPSTOX FUNDING
      Company Email:
      Text/Call :(302) 273-5794.

  2. Testimony of financial breakthrough from GOD through the help of Funding Circle Loan INC. ( OR Call/Text +14067326622)...

    Hi I'am Evelyn Russell resident at 808 NE 19th St Oklahoma City, I am a single mother blessed with 2 daughters. For a while now I have been searching for a genuine loan lender who could help me with a loan as I no longer have a job, all I got were hoodlums who made me trust them and at the end they took my money without giving me any loan, my hope was lost, I got confused and frustrated, it became difficult for my family to feed with a good meal, I never wanted to have anything to do with any loan lending companies on the internet again. Not until I met a Godsent loan lender that changed my life and that of my family Through the help of a fellowship member "a lender with the fear of God in him Mr JASON RAYMOND, he was the man God sent to elevate my family from suffering. At first I thought it wasn’t going to be possible due to my previous experience until I received my loan worth $135,000.00 USD in less then 24hours. So my advise to anyone out there genuinely in need of a loan is to contact Funding Circle Loan INC through this official email:- OR Call/Text +14067326622 and be financial lifted.


    Our loans are well insured for maximum security is our priority, Our leading goal is to help you get the service you deserve, Our Loan program is the quickest. We give out loan in any currency of your choice { Dollar, pounds, Euro, Dinar, etc} and duration of 1 to 50 years to pay back the loan (secure and unsecured).

    Do you need any kind of loan and have low credit score, Have you find it difficult to get loans
    from local banks and other financial institutions? solution to your financial problem is PROSPER LOAN FIRM. The terms and conditions are very reasonable and considerate.

    We offer a wide range of financial services which includes: Business Loan, Debt Consolidation Loans, Personal Loans, Car loans, Hotel loans, Student loans, Home Refinancing Loans with low interest rate @2% per annul for individuals, companies and corporate bodies.

    Interested applicants should Contact us via email: OR Apply and be free from financial bondage.

    Hi everyone, i am Alexis Ohanian am so glade coming back to this great forum to testify about the help i received from Chester Brian. I was in desperate need of a loan in other to be free from debt and financial bondage that was place on me by my ex husband. It was really bad that i have to seek for help from Friends,family and even my bank but on one could assist me because my credit score was really bad. So i was browsing with my computer and saw some testimonies from people Chester Brian assisted with a loan, then i decided to contact him on his email {}, then i received a mail from them and i did all that was asked from me. To my greatest surprise they transferred to my account the loan i requested and now i am so happy clearing my debt and have also started a business with the remaining amount to take care of myself and family. If you need a loan do contact the best loan lender of all time Chester Brian on his email: {}