Jim covered the salient aspects of the 2008Q4 advance release in an earlier post. A few additional points: (i) exports for sure are not adding to growth, (ii) the positive contribution from decreasing imports does not augur well for future growth, and (iii) nonresidential investment has now followed residential investment with vigor. But the key point is consumption is now collapsing at a rate comparable to the 1980 recession…
Figure 1: Log consumption (blue) and durables consumption (red), in billions of Ch.2000$ SAAR. NBER defined recessions shaded gray (2007 recession dates assume recession has not ended by 2009Q1). Source: BEA NIPA advance release of 30 January 2009 and NBER.
Note that the drop in consumption was not manifested in the last recession. Indeed, a longer perspective confirms the depth of this drop off in consumption.
Figure 2: Four quarter growth rate of consumption (blue) and of durables consumption (red), in billions of Ch.2000$ SAAR. NBER defined recessions shaded gray (2007 recession dates assume recession has not ended by 2009Q1). Source: BEA NIPA advance release of 30 January 2009, NBER, and author’s calculations.
So, while GDP annual growth has not yet plumbed the depths recorded in the early 1980’s, consumption is right there…
By the way, the behavior of consumption has some implications for the debate over the proper course of fiscal policy. If consumption is falling because the marginal propensity to consume out of disposable income (MPC) is declining (the b parameter in this post), then — in terms of maximizing the impact on aggregate demand arising from a dollar’s worth of budget deficit — it makes sense to favor government spending on goods and services, as opposed to tax rate cuts. In the extreme, if MPC were zero, then the multiplier is 1 for government spending, and 0 for tax cuts (assuming accommodative monetary policy). Hence, those who argue that the MPC is small and in favor of general tax cuts as a means of stimuluating the economy are not providing an internally consistent argument.
Further, if the decline in the MPC is concentrated on the non-liquidity constrained households, then whatever tax cuts (or transfers increases) occur should be aimed at the most liquidity constrained households.