US Daily Economic Notes:It is not unusual for consumption to grow during economic downturns

Commentary for Wednesday: The May consumption data will impactforecasters’ estimates of current-quarter real GDP growth. For the threemonths ending April, real PCE has grown at a robust 3.8% annualized pace,the fastest rate since March to May 2015. We expect some payback in Mayand June so that inflation-adjusted spending in Q2 should be up around 3%annualized compared to the prior quarter. This would imply a 2.5% year-overyeargrowth rate, which is still decent. Indeed, the consumer has performedrelatively well compared to the rest of the economy. For example, real finalsales less consumption increased just 0.9% (annualized) last quarter followinga -0.2% decline in Q4 2015. Hence, consumer spending has been a modestbright spot compared to other sectors of the economy.

    Unfortunately, history suggests that growth in consumer spending is notenough to prevent a recession, even though the former accounts for roughly70% of expenditures-based GDP. As we discuss in the latest US EconomicsWeekly (“Consumer spending does not guarantee above-trend growth”, June23, 2016), personal consumption expenditures have accounted for a relativelysmall amount of the variation in the growth rate of the economy. Rather, it isprivate investment that accounts for most of the variation in output growth. Inother words, capital spending and inventories are what market participantsneed to worry about most.

    As shown in the chart below, there have been numerous periods when theeconomy entered recession even though overall consumer spending growthremained positive, at least when measured on a year-over-year basis. Duringthe 2001 downturn, real PCE grew at a 2% annual rate. Additionally, year-overyearconsumer spending was also strongly positive during the 1960-61 and1969-70 recessions. Even during the much deeper 1953-54 and 1981-82recessions, real PCE eked out (barely) positive annual gains. In some ways, thecurrent economic environment is reminiscent of 2001 in the sense that if theeconomy were to go into recession, it would likely be due to a pullback inbusiness spending, specifically inventory building and capital expenditures. Weshould note that consumption did not register any quarterly sequential declinesduring the brief 2001 recession. For these reasons, investors should take coldcomfort from continued modest gains in inflation-adjusted consumer spending.