Government Sponsored Spending

The first reading of 3rd quarter GDP was released this morning, with the headline coming in right on top of estimates at 2%. The happy surprise of the report was personal consumption expenditures (PCE), which were better than expectations at 2.6% annualized growth. The strength in PCE, which is now effectively back at its former peak (4Q of 2007), is impressive. PCE as a percentage of GDP seems to have continued its uptrend during this recession, despite a deleveraging household and millions of jobs lost.


Part of PCE is non-cyclical, but part is purely discretionary. Look at spending on recreation: it represents just 8.5% of total PCE, yet it accounted for 30% of the gain in PCE from its lows in mid-2009 and is currently 5.3% above its previous high.


It’s obvious that there are people out there spending on non-discretionary things. This could be related to the weak dollar “staycation” phenomenon (i.e. people traveling less overseas, spending more money at home even though they are spending less overall).

However, without government assistance, incomes to support PCE are still weak. The expiration of extended unemployment benefits has been receiving some media attention lately (see this 60 minutes report, and this from HuffPo). With over 9 million people on regular continuing claims or extended/emergency claims, it’s clear that a significant portion of PCE is on government support. This is evidenced by an interesting phenomenon that we first highlighted back in March 2010: For the first time in the history of the data series, consumption expenditures are exceeding ex-transfer income. And the margin is getting wider. The expiration of unemployment benefits could be a tough negative shock for the economy to endure.


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