The four components of GDP—investment spending, net exports, government spending, and consumption—don’t move in lockstep with each other. In fact, their levels of volatility differ greatly. We can observe this in FRED by graphing the annual percent changes of each component. Investment (solid red) and net exports (solid yellow) are extremely volatile, varying greatly during economic contractions and expansions. In contrast, government spending (dashed blue) and consumption (dashed green) are highly stable; although they also vary with the business cycle, they do so to a much smaller extent. This pattern can be important for the effectiveness of monetary policy. According to economic textbooks, when the Fed lowers interest rates, investment spending and U.S. exports become cheaper, all else being equal. So, when the Fed lowers rates, it affects the two variables that disproportionately contribute to any given change in GDP.
How this graph was created: Add all of the series listed below to one graph with the “Add Data Series” function. Set their units to “Percent Change from Year Ago.” Use the “Line Style” option to give solid lines to the first two series and dashed lines to the last two and set “Line Width” to 1 for all four. Finally, take advantage of the “Color” option for each series to color the lines as you wish.
Series used in this post: GPDIC1, NETEXC, PCECC96, GCEC96.
Suggested by Ian Tarr.
