Tag: Components of GDP

Real GDP Growth Revised Up and PCE Inflation Running Slightly Below Expectations

Image generated by ChatGPT

Today (September 26), the Bureau of Economic Analysis (BEA) released monthly data on the personal consumption expenditures (PCE) price index as part of its “Personal Income and Outlays” report. Yesterday, the BEA released its revised estimate of real GDP growth in the second quarter. Taken together, the two reports show that economic growth remains realtively strong and that inflation continues to run above the Fed’s 2 percent annual target.

Taking the inflation report first, the following figure shows headline PCE inflation (the blue line) and core PCE inflation (the red line)—which excludes energy and food prices—for the period since January 2018, with inflation measured as the percentage change in the PCE from the same month in the previous year. In August, headline PCE inflation was 2.7 percent, up from 2.6 percent in July. Core PCE inflation in August was 2.9 percent, unchanged from July. Headline PCE inflation was equal to the forecast of economists surveyed, while core PCE inflation was slightly lower than forecast.

The following figure shows headline PCE inflation and core PCE inflation calculated by compounding the current month’s rate over an entire year. (The figure above shows what is sometimes called 12-month inflation, while this figure shows 1-month inflation.) Measured this way, headline PCE inflation increased from 2.0 percent in July to 3.2 percent in August. Core PCE inflation declined slightly from 2.9 percent in July to 2.8 percent in August. So, both 1-month and 12-month PCE inflation are telling the same story of inflation being well above the Fed’s target. The usual caution applies that 1-month inflation figures are volatile (as can be seen in the figure). In addition, these data likely reflect higher prices resulting from the tariff increases the Trump administration has implemented. Once the one-time price increases from tariffs have worked through the economy, inflation may decline. It’s not clear, however, how long that may take and President Trump indicated yesterday that he may impose new tariffs on pharmaceuticals, large trucks, and furniture.

Fed Chair Jerome Powell has frequently mentioned that inflation in non-market services can skew PCE inflation. Non-market services are services whose prices the BEA imputes rather than measures directly. For instance, the BEA assumes that prices of financial services—such as brokerage fees—vary with the prices of financial assets. So that if stock prices fall, the prices of financial services included in the PCE price index also fall. Powell has argued that these imputed prices “don’t really tell us much about … tightness in the economy. They don’t really reflect that.” The following figure shows 12-month headline inflation (the blue line) and 12-month core inflation (the red line) for market-based PCE. (The BEA explains the market-based PCE measure here.)


Headline market-based PCE inflation was 2.4 percent in August, unchanged from July. Core market-based PCE inflation was 2.6 percent in August, also unchanged from July. So, both market-based measures show inflation as stable but above the Fed’s 2 percent target.

In the following figure, we look at 1-month inflation using these measures. One-month headline market-based inflation increase sharply to 2.5 percent in August from 0.9 percent in July. One-month core market-based inflation increased slightly to 1.9 percent in August from 1.8 percent in July. As the figure shows, the 1-month inflation rates are more volatile than the 12-month rates, which is why the Fed relies on the 12-month rates when gauging how close it is coming to hitting its target inflation rate.


Inflation running above the Fed’s 2 percent target is consistent with relatively strong growth in real GDP. The following figure shows compound annual rates of growth of real GDP, for each quarter since the first quarter of 2023. The value for the second quarter of 2025 is the BEA’s third estimate. This revised estimate increased the growth rate of real GDP to 3.8 percent from the second estimate of 3.3 percent.

The most important contributor to real GDP growth was growth in real personal consumption expenditures, which, as shown in the following figure, increased aat compound annual rate of 2.5 percent in the second quarter, up from 0.6 percent in the first quarter.

High interest rates continue to hold back residential construction, which declined by a compound annual rate of 5.1 percent in the second quarter after declining 1.0 percent in the first quarter.

Business investment in structures, such as factories and office buildings, continued a decline that began in the first quarter of 2024.

Will the relatively strong growth in real GDP in the second quarter continue in the third quarter? Economists at the Federal Reserve Bank of Atlanta prepare nowcasts of real GDP. A nowcast is a forecast that incorporates all the information available on a certain date about the components of spending that are included in GDP. The Atlanta Fed calls its nowcast GDPNow. As the following figure from the Atlanta Fed website shows, today the GDPNow forecast is for real GDP to grow at an annual rate of 3.9 percent in the third quarter.

Finally, the macroeconomic data released in the last two days has had realtively little effect on the expectations of investors trading federal funds rate futures. Investors assign an 89.8 percent probability to the Federal Open Market Committee (FOMC) cutting its target for the federal funds rate at its meeting on October 28–29 by 0.25 percentage point (25 basis points) from its current range of 4.00 percent to 4.25 percent. That probability is only slightly lower than 91.9 percent probaiblity that investors had assigned to a 25 basis point cut a week ago. However, the probability of the committee cutting its target rate by another 25 basis points at its December 9–10 fell to 67.0 percent today from 78.6 percent one week ago.

Real GDP Growth Slows in the Fourth Quarter, While PCE Inflation Remains Above Target

Image generated by ChatGTP-4o illustrating GDP

Today (January 30), the Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the fourth quarter of 2024. (The report can be found here.) The BEA estimates that real GDP increased at an annual rate of 2.3 percent in the fourth quarter—October through December. That was down from the 3.1 percent increase in real GDP in the third quarter. On an annual basis, real GDP grew by 2.5 percent in 2024, down from 3.2 percent in 2023. A 2.5 percent growth rate is still well above the Fed’s estimated long-run annual growth rate in real GDP of 1.8 percent. The following figure shows the growth rate of real GDP (calculated as a compound annual rate of change) in each quarter since the first quarter of 2021.

Personal consumption expenditures increased at an annual rate of 4.2 percent in the fourth quarter, while gross private domestic investment fell at a 5.6 annual rate. As we discuss in this blog post, Fed Chair Jerome Powell’s preferred measure of the growth of output is growth in real final sales to private domestic purchasers. This measure of production equals the sum of personal consumption expenditures and gross private fixed investment. By excluding exports, government purchases, and changes in inventories, final sales to private domestic purchasers removes the more volatile components of gross domestic product and provides a better measure of the underlying trend in the growth of output.

The following figure shows growth in real GDP (the blue line) and in real final sales to private domestic purchasers (the red line) with growth measured as compound annual rates of change. Measured this way, in the fourth quarter of 2024, real final sales to private domestic producers increased by 3.2 percent, well above the 2.3 percent increase in real GDP. Growth in real final sales to private domestic producers was down from 3.4 percent in the third quarter, while growth in real GDP was down from 3.1 percent in third quarter. Overall, using Powell’s preferred measure, growth in production seems strong.

This BEA report also includes data on the private consumption expenditure (PCE) price index, which the FOMC uses to determine whether it is achieving its goal of a 2 percent inflation rate. The following figure shows inflation as measured using the PCE (the blue line) and the core PCE (the red line)—which excludes food and energy prices—since the beginning of 2016. (Note that these inflation rates are measured using quarterly data and as percentage changes from the same quarter in the previous year to match the way the Fed measures inflation relative to its 2 percent target.) Inflation as measured by PCE was 2.4 percent, up slightly from 2.3 percent in the third quarter. Core PCE, which may be a better indicator of the likely course of inflation in the future, was 2.8 percent in the fourth quarter, unchanged since the third quarter. As has been true of other inflation data in recent months, these data show that inflation has declined greatly from its mid-2022 peak while remaining above the Fed’s 2 percent target.

This latest BEA report doesn’t change the consensus view of the overall macroeconomic situation: Production and employment are growing at a steady pace, while inflation remains stubbornly above the Fed’s target.

Real GDP Growth Comes in Slightly Below Expectations, Inflation Is Below Target, and the Labor Market Shows Some Weakening

Image of GDP generated by GTP-4o

This week, two data releases paint a picture of the U.S. economy as possibly slowing slightly, but still demonstrating considerable strength. The Bureau of Economic Analysis (BEA) released its advance estimate of GDP for the third quarter of 2024. (The report can be found here.) The BEA estimates that real GDP increased by 2.8 percent at an annual rate in the third quarter—July through September. That was down from the 3.0 percent increase in real GDP in the second quarter and below the 3.1 percent that economists surveyed by the Wall Street Journal had expected. The following figure from the BEA report shows the growth rate of real GDP in each quarter since the fourth quarter of 2020.

Two other points to note: In June, the Congressional Budget Office (CBO) had forecast that the growth rate of real GDP in the third quarter would be only 2.1 percent. The CBO forecasts that, over the longer run, real GDP will grow at a rate of 1.7 to 1.8 percent per year. So, the growth rate of real GDP according to the BEA’s advance estimate (which, it’s worth recalling, is subject to potentially large revisions) was above expectations from earlier this year and above the likely long run growth rate.

Consumer spending was the largest contributor to third quarter GDP growth. The following figure shows growth rates of real personal consumption expenditures and the subcategories of expenditures on durable goods, nondurable goods, and services. There was strong growth in each component of consumption spending. The 8.1 percent increase in expenditures on durables was particularly strong. It was the second quarter in a row of strong growth in spending on durables after a decline of –1.8 percent in the first quarter.

Investment spending and its components were a more mixed bag, as shown in the following figure. Investment spending is always more volatile than consumption spending. Overall, gross private domestic investment increased at a slow rate of 0.3 percent—the slowest rate since a decline in the first quarter of 2023. Residential investment decreased by 5.1 percent, reflecting difficulties in residential construction due to mortgage interest rates remaining high. Business fixed investment grew 3.1 percent, powered by an increase of 11.1 percent in spending on business equipment. Spending on structures—such as factories and office buildings—had increased rapidly over the past two years before slowing to a 0.2 percent increase in the second quarter and a decline of 4.0 percent in the fourth quarter.

The GDP report also contained data on the private consumption expenditure (PCE) price index, which the FOMC uses to determine whether it is achieving its goal of a 2 percent inflation rate. The following figure shows inflation as measured using the PCE and the core PCE—which excludes food and energy prices—since the beginning of 2016. (Note that these inflation rates are measured using quarterly data and as compound annual rates of change.) Despite the strong growth in real GDP, inflation as measured by PCE was only 1.5 percent, below the 2.5 percent increase in the second quarter and below the Federal Reserve’s 2.0 percent inflation target. Core PCE, which may be a better indicator of the likely course of inflation in the future, declined to 2.2 percent in the third quarter from 2.8 percent in the second quarter. The third quarter increase was slightly above the rate that economists surveyed by the Wall Street Journal had expected.

This week, the Bureau of Labor Statistics (BLS) released its “Job Openings and Labor Turnover” (JOLTS) report for September 2024. The report provided data indicating some weakening in the U.S. labor market. The following figure shows the rate of job openings. The BLS defines a job opening as a full-time or part-time job that a firm is advertising and that will start within 30 days and the rate of job openings as the number of job openings divided by the number of job openings plus the number of employed workers, multiplied by 100. The 4.9 percent job opening rate in September continued the slow decline from the peak rate of 7.4 percent in March 2022. The rate is also slightly below the rate during late 2018 and 2019 before the Covid pandemic.

In the following figure, we compare the total number of job openings to the total number of people unemployed. The figure shows a slow decline from a peak of more than 2 job openings per unemployed person in the spring of 2022 to 1.1 job openings per employed person in September 2024, somewhat below the levels in 2019 and early 2020, before the pandemic. Note that the number is still above 1.0, indicating that the demand for labor is still high, although no higher than during the strong labor market of 2019.

Finally, note from the figure that over the period during which the BLS has been conducting the JOLTS survey, the rate of job openings has declined just before and during recessions. Does that fact indicate that the decline in the job opening rate in recent months is signaling that a recession is likely to begin soon? We can’t say with certainty, particularly because the labor market was severely disrupted by the pandemic. The decline in the job openings rate since 2022 is more likely to reflect the labor market returning to more normal conditions than a weakening in hiring that signals a recession is coming.

To summarize these data:

  1. Real GDP growth is strong, although below what economists had been projecting.
  2. Inflation as measured by the PCE is below the Fed’s 2 percent target, although core inflation remains slightly above the target.
  3. The job market has weakened somewhat, although there is no strong indication that a recession will happen in the near future.