Inside the GDP report

After a dismal showing in the first quarter, the U.S. economy grew at an annualized rate of 3.4 percent in the second quarter, the best performance in over a year. The details, however, contain some ominous signs for what may lay ahead.

Gross domestic product measures the total output of an economy or the combined value of all goods and services and is the most important indicator of economic health.

There are four major categories:

• Personal consumption expenditures
• Gross private domestic investment
• Net exports of goods and services
• Government consumption expenditures and gross investment

As shown in the chart below, consumer spending (in blue) has contributed the lion's share of growth in recent years but contracted sharply from a 2.56 percentage point contribution to overall GDP in the first quarter to just 0.89 percentage points in the second quarter.

With the exception of the Hurricane Katrina afected fourth quarter of 2005, this was the weakest period of consumer spending since the second quarter of 2001, and is roughly half of the average for the last four years.


You can see what might happen above based on the lagged effect of the housing boom on consumption. Private domestic investment (in red), of which one-third is residential construction, began to wane early in 2006 and then turned negative - now consumer spending drops precipitously.

Where will consumer spending go from here?

The last time consumer spending detracted from economic growth was back in 1991, but just maintaining the current level will likely be enough to post a negative overall growth number given the volatility in the other components.

Consumer spending, driven in large part by the housing boom and increased debt, has been a prop under the U.S. economy for years - it may be that the prop is being removed.