Friday, September 28, 2007

Estimating PCE Growth for Q3

by Bill McBride on 9/28/2007 12:54:00 PM

The BEA releases Personal Consumption Expenditures monthly (as part of the Personal Income and Outlays report) and quarterly, as part of the GDP report (also released separately quarterly).

You can use the monthly series to exactly calculate the quarterly change in PCE. The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next (several people have asked me about this). Instead, you have to average all three months of a quarter, and then take the change from the average of the three months of the preceding quarter.

So, for Q3, you would average PCE for July, August and September, then divide by the average for April, May and June. Of course you need to take this to the fourth power (for the annual rate) and subtract one.

The September data isn't released until after the advance Q2 GDP report. But we can use the change from April to July, and the change from May to August (the Two Month Estimate) to approximate PCE growth for Q3.

Personal Consumption Expenditures Click on graph for larger image.

This graph shows the two month estimate versus the actual change in real PCE. The correlation is high (0.92).

The two month estimate suggests real PCE growth in Q2 will be about 3.0%.

In general the two month estimate is pretty accurate. Sometimes the growth rate for the third month of a quarter is substantially stronger or weaker than the first two months. As an example, in Q3 2005, PCE growth was strong for the first two months, but slumped in September because of hurricane Katrina. So the two month estimate was too high.

And the following quarter (Q4 2005), the two month estimate was too low. The first two months of Q4 were negatively impacted by the hurricanes, but real PCE growth in December was strong.

You can see a similar pattern in Q3 2001 because of 9/11.

Usually I go with the two month estimate (around 3%), however I think Q3 2007 might be one of the exceptions and real PCE growth could have slowed sharply in September (although maybe not until in October).