by Calculated Risk on 10/31/2007 04:15:00 PM

Each quarter I've been estimating PCE growth based on the Two Month method. Once again, this method has provided a very close estimate for the actual PCE growth.

Some background: 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 Q3 GDP report. But I used the change from April to July, and the change from May to August (the Two Month Estimate) to approximate PCE growth for Q3.

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 suggested real PCE growth in Q3 would be about 3.0%. The actual result (in the Advance GDP report) was also 3.0%.

Since the two month estimate was very accurate, this suggests that there was little slowdown in consumer spending in September.

As an aside, the Fed now has the results (not public yet) of the October Senior Loan Officer survey. Based on the Fed statement today, I bet the numbers are ugly.