Tuesday, April 7, 2009

U.S. GDP and Personal Consumption

There are four major components of U.S. GDP: Private Domestic Investment, Government Consumption and Investment, Net Exports, and Personal Consumption. Since 1970, Personal Consumption has increased significantly in its share of GDP, while the Net Exports component has declined.

Personal consumption has been fostered by lower interest rates, making debt easier to obtain and also service. The Fed Funds rate has plummeted since 1980, and now stands at essentially zero. But despite this, debt servicing obligations have increased markedly.

With rates so low, there seems little chance of increasing the dynamicism in personal consumption until balance sheets are repaired. Lower consumption might re-balance the trade deficit, through a decrease in imports, which would ameliorate GDP decline. (8/12 Note : So far, the trade deficit hasn't narrowed significantly. GDP has been supported by government consumption and investment)

No comments: