Friday’s news that US GDP slowed markedly in Q4 2015 to 0.7% from a preliminary estimate of 2% was a surprise to many, but the trend was clear from looking at the data. The Personal Consumption Expenditure (PCE) provides an effective measurement of consumption in The United States. In other words, when people buy stuff the money spent rolls up into the PCE. This is important for several reasons, not least of which is consumption drives roughly 70% of the US economy. People stop buying stuff , the economy slows. Its really that simple (if we ignore government spending, which historically surges is US Presidential Election years).
The chart below shows the relationship between the PCE (red) and Business Inventories (black). Inventories are starting to rise indicating people simply aren’t buying as much stuff as they were back in 2011. The last time we saw a collapse in PCE was in 2013 when, coincidentally enough, The Fed embarked on a third round of Quantitative Easing.
Is another round of Quantitative Easing possible?
Remember, The Fed’s goal is 3% GDP in 2016. With the global economy continuing to slow, that simply ain’t gonna happen. In fact, concerns are growing that The United States may teeter into recession by the end of 2016.
If inventories continue to rise businesses will cut back. People will be laid off and then consumption will really collapse.