Households' Expenditures on Services and the Recovery
Real GDP grew at an annualized rate of 3.6 percent in the third quarter of 2013 according to the Bureau of Economic Analysis’s second estimate. This is considerably above the advance estimate of 2.8 percent that was released in November, and it’s the fastest pace since the first quarter of 2012. The second estimate incorporates a more complete set of data than the advance estimate, and the upward revision is mainly the result of upward revisions to private inventory investment. In fact, this was the largest inflation-adjusted increase in inventories since 1998.
Netting out the change in inventories, real (inflation-adjusted) final sales of domestic products grew only at a 1.9 percent annualized rate, slightly less than in the previous quarter, as real personal consumption expenditures grew at an anemic 1.4 percent pace, down from 1.8 percent in the second quarter.
The slow recovery from the Great Recession is now a well-established fact. The figure measures GDP growth from the trough of the recession (to isolate the recovery) and shows exactly just how slow this recovery has been compared to all other recessions since the early 1960s. Real GDP has grown at an annualized rate of 2.3 percent since the second quarter of 2009, compared to 4.4 percent in the average recovery.
Going deeper into the National Income and Product Accounts helps elucidate what categories are underperforming relative to the average recovery. Private investment, no doubt spurred by some of the lowest real interest rates in US history, has actually been growing at a pace that is close to that of previous recoveries. This is not to say that the behavior of private investment was average-like throughout the recession. Since this recession was much deeper than the average one, private investment would still be lagging the average recession if we had started our analysis at the pre-recession peak. Meanwhile, growth in personal consumption expenditures (PCE) and government consumption and investment has lagged substantially in the recovery period.
Because PCE is a much larger share of total output than government spending, its subpar growth constitutes more of a drag on GDP than does government spending, even though the latter has actually declined through the recovery. This means that if PCE had grown according to its recovery average, GDP would have grown more than if government spending had grown at its average recovery pace instead.
Digging in a bit more into the way the subcomponents of private consumption have behaved, we see that consumer durables actually increased at a pace that is consistent, if a little below, the average recovery. Durables, by their nature, tend to behave similarly to investment goods, and therefore they have also benefited from the aforementioned low-interest-rate environment. In contrast, the growth of nondurable goods consumption has significantly lagged its average recovery pace. But nondurables represent only 23 percent of overall PCE; it is services expenditures, representing a massive two-thirds of overall PCE, which have been the major drag.
The largest component of services expenditures, housing and utilities expenditures (representing around 27 percent of services), has grown at an annualized rate below 1 percent in the current recovery in real terms. Even health care (representing 25 percent of services expenditures), which has traditionally grown faster than overall GDP in real terms in the last 40 years, has grown at only 2.1 percent in this recovery. Other services categories, like transportation services, have been growing at an even slower pace, but they represent a much smaller share of overall services.
It is not our purpose here to provide an in-depth analysis of the recovery; that cannot really be done without investigating the causes of the recession and their consequences. At a very cursory level though, to the extent that the Great Recession resulted in a substantive deleveraging effort on the part of households, we would expect to see most consumer expenditure categories lagging the average recovery. But if we had to pinpoint exactly which one is hurting the overall economy the most in terms of real GDP growth, we would have to say it is services expenditures.