by Calculated Risk on 6/29/2007 05:06:00 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 Q2, you would average PCE for April, May and June, then divide by the average for January, February and March. Of course you need to take this to the fourth power (for the annual rate) and subtract one.

Of course June isn't released until after the advance Q2 GDP report. But we can use the change from January to April, and the change from February to May (the Two Month Estimate) to approximate PCE growth for Q2.

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).

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.

But in general, the two month estimate is pretty accurate. Maybe June was exceptionally strong, or maybe April and May will be revised upwards, but the two month estimate suggests real PCE growth in Q2 will be about 1.5%.

For other reasons - like business investment and inventory changes - Q2 growth will probably be stronger than Q1. But the scratching sound you are hearing is from Wall Street firms revising down estimates for Q2 PCE and GDP growth.