Y = C + I + G + (X − M) or Why Central Planning and Fed Policy Failed [Reader Post]

Crossposted from Confounded Interest

The Case-Shiller 20 city index sparked hope for the housing market recovery. It was actually UP for the first time in months (+0.7 NSA, but -0.1% SA). Of course, one good month doesn’t make a rally – we need at least 3-6 consecutive months for there to be a sustainable recovery. But before we get all excited, let’s look at GDP growth.

Y = C + I + G + (X − M)

which is GDP = Consumption + Investment + Government Expenditures and Investment + (Exports – Imports)

Break it down.

First, let’s look at Real Consumption Expenditures. Downward trend and it is now negative in terms of growth. Not a good sign, particularly since it is about 70% of GDP. We are going to turn around 70% of the economy over the next 6 months?

Second, Real Gross Private Domestic Investment.Well, at least this segment of GDP is increasing (as of Q1 2011).  That is good news, but what is the breakdown?

We know it can’t be real private RESIDENTIAL fixed investment since home builders have been pretty quiet the last few years.

Is it real private NONRESIDENTIAL fixed investment? No, that market has been quiet as well.

So, the big ticket items in Real Gross Private Domestic Investment are fairly flat. Equipment and software, on the other hand, grew at almost 10%. But they are a small percentage of investment (7.5%).

Three, how about Uncle Sam’s Real Consumption Expenditures and Gross Investment? Well, that’s declining too.

Fourth, all we have left is real net exports. And that has taken a big hit.

I have examined each of the components of GDP. ALL are declining but Real Gross Private Domestic Investment. But can we rely on continued growth in equipment and software to drive Q3 and Q4 GDP?

This is why I am less than optimistic about a recovery in the housing market this year. We need real growth and it has to be above 1.9%.