Analyzing the components of spending by consumers (C), firms (I), the government (G) and net exports is important in determining the near future development of the real Gross Domestic Product (GDP). This report examines how the components listed above are predicted to evolve and change in the near future. This report only focused on estimates for the short term (6 months to 1 year) and medium term (2 to 3 years) periods. Most data analyzed came from the U.S. Department of Commerce, Bureau of Economic Analysis, and the data for each year was divided into four quarters. In this report, data from 2017 will be examined, specifically that of data from quarter 1 to quarter 3, as data for the fourth quarter of 2017 is still being processed. When it was applicable, historical data was compared and contrasted with current data. Through this analysis of current and historical data of the different components, it can be predicted that the real GDP as a whole will increase for the short and medium term in the future. These predictions will be discussed in the following sections for each component.
Personal Consumption Expenditures Overview & Description
The first spending component of real GDP to be analyzed is the sum of spending by consumers. Personal consumption expenditures can be described as “The total amount of spending by consumers on durable goods, nondurable goods and services in a given period of time” (Farnham, 2014). This component will be examined to see how it will develop and change in the short and medium run. Consumer spending has a large influence on the real GDP, accounting for approximately 68.9 percent of the real GDP for the third quarter in 2017, thus it is important for this topic to be thoroughly examined.1 From examining data from the Bureau of Economic Analysis, it can be observed that there is a fluctuating percentage change in consumption expenditures for the different quarters, Q1 – Q3, in 2017 under the category of personal consumption expenditures. During the 2017 first quarter, there was only a slight change in the percentage of consumption expenditures, with an increase of 1.9% from the preceding period.2 This change in value contrasts to the larger percentage of consumption increase for quarter 2 at a value of 3.3%.2 During the third quarter the percentage increase from the preceding period was recorded at a value of 2.2%, which is still a larger percent increase than that of the first quarter.2 After examining quantity indexes for the year 2017, it can be concluded that personal consumption expenditures have overall increased since 2015. Goods, both durable and nondurable have seen an increase since the first quarter of 2016. Furthermore, services have increased significantly since 2015.
Historical Data on Personal Consumption Expenditures & Analysis
Looking at historical data can give a better outlook of the trends of personal consumer expenditures throughout the years. From 1990 – 2017, personal consumption expenditures have consistently increased, with only a slight decrease in 2008/2009. In addition, expenditures on goods and services for 1990 – 2017 have gradually increased, with few decreases in 2008/2009 and a minor decrease in 2011 for goods. This decrease in 2008/2009 is likely related to the recession when the housing bubble burst. There has not been much fluctuation in personal consumption expenditures, thus in the future values may continue to rise or stay consistent. Another variable to consider when examining consumer spending, is personal income which increased for the year 2017.3 This increase in wages will likely help to increase the real GDP. Furthermore, there is consumer confidence which can be defined as the feelings that consumers hold about the present and future economy. According to the Conference Board, consumer confidence has decreased for the month of December by 6.5 points. Consumer confidence is an important aspect to help determine the real GDP, as a declining consumer confidence can be a sign that the economy is slowing down in activity. It can be predicted that with rising income, personal consumption expenditures will likely rise, however due to a decrease in consumer confidence, these values may not increase significantly.
Gross Private Domestic Investment Spending Overview & Description
Spending by firms, and gross private domestic investment will be the next component of the real GDP that will be discussed. This can be explained as when a firm expands their assets through buying goods or through investing. As quoted in the text, Economics for Managers by Paul Farnham, in regard to investments, “Business fixed investment encompasses the spending on structures, equipment, and software that provide the industrial capacity to produce goods for all sectors of the economy.” Variables included in gross private domestic investments will be analyzed, compared, and contrasted between different time periods in order to have a better future prediction of the short and medium term real GDP. It is important to emphasize that the data examined for this analysis came from the Bureau of Economic Analysis U.S. Department of Commerce. For 2017, the gross private domestic investment increased throughout the quarters recorded, Q1-Q3. The 2017 third quarter for gross private domestic investment accounted for approximately 16.7 percent of the real GDP, which is slightly more that that of 2016 which was 16.3 percent during the third quarter.1 Most of the values of components included under gross private domestic investment were positive and increased with the exception of residential investment which slightly decreased after the first quarter in 2017. Change in private inventories were negative for the first quarter in 2017 but increased during the second and third quarters during the year. Change in private inventories have been significantly dropping since 2015 and just now are starting to increase during the third quarter of 2017.
1 Bureau of Economic Analysis, U.S. Department of Commerce, Table 1.1.5, Gross Domestic Product: 2015-2017
2 Bureau of Economic Analysis, U.S. Department of Commerce, Table 1.11, Percent Change from Preceding Period in Real Gross Domestic Product: 2015-2017
3 Bureau of Economic Analysis, U.S. Department of Commerce, Table 2.1, Personal Income, and Its Disposition: 2015-2017