Sunday, August 2, 2015

2nd quarter GDP and annual revisions, June durable goods, May Case-Shiller home price indices, et al

the key report that we'll review this week is the advance estimate of 2nd quarter GDP from the Bureau of Economic Analysis, which included revisions of previously published GDP data back to 2012…other widely watched reports included the June advance report on durable goods and the May Case-Shiller Home Price Index, while the week also saw the BLS releases of the Metropolitan Area Employment and Unemployment Summary for June and the 2nd Quarter Employment Cost Index, which indicated that total wages and benefits grew at the slowest pace in 33 years in the 2nd quarter, as the index rose by just 0.2%...the week also saw the last two regional Fed manufacturing surveys for July: the Richmond Fed Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, which reported its broadest composite index rose to 13, following last month's reading of 7 and the May reading of 1, indicating an accelerating expansion of manufacturing activity in the 5th District, and the Texas area manufacturing survey from the Dallas Fed, which saw their general business activity index improve to -4.6 in July, from -7.0 in June and -20.8 in May, indicating a moderating recession in the district’s manufacturing....we also saw the July Chicago Business Barometer, a privately issued manufacturing diffusion index issued by the Chicago ISM, which increased 5.3 points to 54.7 in July, only the 2nd expansionary reading from that index this year in this index where readings above 50 indicate a plurality of regional purchasing managers saw their businesses growing...

Advance Estimate of 2nd Quarter GDP & Revisions From 2012 to Present

the Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis included an annual revision to the past 3 years of GDP data, which on net indicated that economic growth over the period from 2012 to 2014 was at a 2.0% annual rate, revised from the 2.3% composite annual growth previously published for that period of the recovery, making what was already the weakest economic expansion since World War II even weaker; GDP growth for 2012 was revised from 2.3% to 2.2%; our growth rate for 2013 was revised from 2.2% to 1.5%, and our growth rate for 2014 was unrevised at 2.4%, although many 2014 components were revised in arriving at the unchanged composite result...

in addition to the annual revisions, the BEA undertook to correct seasonal adjustments applied to GDP components since the recession began; the reason this was deemed necessary was that seasonal adjustments are made by a program that blindly looks at seasonal data going back several years and adjusts the current data based on what are seen by the program as seasonal patterns, such as to smooth out the effects of seasonal changes in economic activity, such as around Christmas or at the end of the school year...however, since the great recession was so abrupt and deep, it skewed the subsequent automatic adjustments such as to generally make the winter months appear worse than they were and generally show corresponding better growth during the summer months...hence, in 2012, the annual rate of change in GDP was revised up 0.4 percentage points for the first quarter, up 0.3 percentage points for the 2nd quarter, down 2.0 percentage points for the third quarter, while the growth rate for the fourth quarter was unrevised; for 2013, downward revisions of 0.8 percentage points for the first quarter, 0.7 percentage points for the second quarter, and 1.5 percentage points for the third quarter were partly offset by an upward revision of 0.3 percentage point for the fourth quarter, while in 2014 the annual rate of change in GDP was revised up 1.2  percentage points for the first quarter, down 0.7 percentage points for the 3rd quarter, down 0.1 percentage points for the fourth quarter, while the 2nd quarter growth rate remained unchanged..

finally, for the first quarter of 2015, which had been most recently reported with a contraction of 0.2% in the 3rd estimate which we reviewed a month ago, growth has been revised to a positive 0.6% rate; major components that were revised higher included an upward revision to nonresidential fixed investment, from a contraction at a 2.0% rate to growth at a 1.6% rate, a revision to growth in real private inventory investment, from growth at a $99.5 billion rate in 2009 dollars, $19.5 billion greater than the 4th quarter, to real growth at $112.8 billion rate, $34.6 billion greater than the revised 4th quarter, a revision to growth in real residential fixed investment from growth at a 6.5% rate to growth at a 10.1% rate, a revision to real federal government consumption from unchanged to growth at a 1.1% rate, all of which were partly offset by a downward revision to personal consumption expenditures from growth at a 2.1% rate to growth at a 1.8% rate....thus the figures for the 1st quarter of 2015 have gone from the initial estimate of growth at a 0.2% rate, to a 0.7% rate of contraction in the 2nd estimate, to a 0.2% rate of contraction in the 3rd estimate, and finally back to growth at a 0.6% rate in this annual revision...

all of those revisions should leave you with the sense to take the advance estimates of 2nd quarter growth which were made this week, with some June reports still missing, with a grain of salt...the Advance Estimate of 2nd Quarter GDP indicated that the real output of goods and services produced in the US grew at a 2.3% annual rate over the output of the 1st quarter of this year, which we have just seen was revised to show growth at a 0.6% rate...the BEA cautions that the source data is incomplete and also subject to revisions, which have now averaged +/-0.6% in either direction for nominal GDP, and +/- 0.6% for real (inflation adjusted) GDP before the third estimate is released, which will be two months from now, and ultimately +/- 1.2% and +/-1.3% respectively before the final revision on each is filed....note that June trade and inventory data have yet to be reported, and that the BEA assumed no change in nondurable manufacturing inventories, and that real wholesale and retail inventories had increased in June...

while we cover the details below, remember that the press release for GDP reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that they only use the prefix "real" to indicate that the change has been adjusted for inflation using prices chained from 2009, and then calculate all percentage changes in this report from those nonsense 2009 dollar figures, which we think would be better thought of as a quantity indexes...given the misunderstanding evoked by the text of the press release, all the data that we'll use in reporting here comes from the pdf for the 1st estimate of 2nd quarter GDP, which is linked to on the sidebar of the BEA press release, which also offer links to just the tables on Excel and other technical notes...specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually and quarterly since 2012, table 2, which shows the contribution of each of the components to the GDP figures for those months and years, table 3a, which shows the current dollar value of each of the GDP components, table 3b, which shows the inflation adjusted value of each of those components, and table 4, which shows the change in the price indexes for each of the components, and which is used to convert current dollar figures into units of output represented by chained dollar amounts...the intervening tables (ie, 1a, 1b, 2a, 2b,etc) give us the previously published data for each of those metrics going back to 2012, should anyone be interested in the finer details of the annual revision...

personal consumption expenditures (PCE), which accounts for over 68% of GDP, grew at a 5.1% rate in current dollars in the 2nd quarter, in contrast to the first quarter decrease at a 0.1% rate, but once the inflation adjustments were made with the PCE price indices for each quarter, real PCE rose 2.9% in the 2nd quarter after rising 1.8% in the first...consumer spending for durable goods rose at a 7.2% rate, mostly on higher automobile purchases, but prices for those durable goods fell by 0.1%, meaning real output of durable goods represented by that spending increased at a 7.3% rate...consumer spending for non durables rose at a 7.5% rate, but the PCE price index for non-durables was up 3.8%, mostly on higher energy prices, reducing real growth in consumption of non durables to a 3.6% rate...in a like manner, personal outlays for services were reduced by a 2.0% deflator to show real 2nd quarter growth in services was at a 2.1% rate...thus, with real growth in all components of personal consumption expenditures, real growth in output of consumer durable goods added 0. 53 percentage points to the change in GDP, real growth in non-durable goods output for consumers added 0.52 percentage points to 2nd quarter GDP growth, and real growth in services provided to consumers added 0.95 percentage points to the change in 2nd quarter GDP...

just as personal consumption expenditures are adjusted for inflation using the PCE price indices to arrive at real PCE, the other current dollar components of GDP are also adjusted for inflation with the quantity indexes shown in table 5 of the GDP pdf to yield the real change in the output of goods or services.....hence, real gross private domestic investment, which had grown at a 8.6% annual rate in the 1st quarter due to an inventory buildup, just grew at a 0.3% annual rate in the 2nd quarter, as investment growth was slower and real non-residential fixed investment fell at a 0.6% rate...of that, real investment in non-residential structures fell at a 1.6% rate and real investment in equipment fell at a 4.1% rate as the pullback in energy investment moderated, while investment in intellectual property grew at 5.5% rate as investment in software grew at a 7.8% rate and accounted for 2/3rd of the intellectual property contribution...so while real investment in intellectual property added 0.22 percentage points to the GDP growth rate, the decrease in real investment in non-residential structures and real investment in equipment subtracted 0.04 and 0.25 percentage points respectively...it was thus only real residential investment, growing at a 6.6% rate, that turned the contribution of investment to GDP positive in the quarter, as it added 0.21 percentage points to the the 2nd quarter's GDP...for an easy to read table as to what's included in each of those investment categories, see the NIPA Handbook, Chapter 6, page 3...

meanwhile, investment in real private inventories grew by an inflation adjusted $110.0 billion in the 2nd quarter after they grew by an adjusted $112.8 billion in the 1st quarter, and as a result the $2.8 billion slower inventory growth subtracted 0.08 percentage points from the 2nd quarter's growth rate, in contrast to the $34.6 billion increase in inventory growth in the 1st quarter that added 0.88 percentage points to that quarter's GDP growth...however, slower growth of inventories means that less of the goods produced during the quarter ended up ‘sitting on the shelf”, so their decrease by $2.8 billion means real final sales of GDP during the quarter were greater by that much, and hence real final sales of GDP increased at a 2.4% rate in the 2nd quarter, in contrast to the real final sales decrease at a 0.2% rate in the 1st quarter, when the change in the increase in inventories was much higher..

after adjustment for lower prices, both real imports and exports increased in the 2nd quarter, as our real exports of goods and services rose at a 5.3% rate in the second quarter, after falling at a 6.0% rate in the 1st quarter, while our real imports rose at a 3.5% rate in the 2nd quarter after rising at a 7.1% rate in the 1st quarter...as you'll recall, increases in exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (& hence not counted in GDP elsewhere), while increases in imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn't have been because it was not produced here....thus the 2nd quarter increase in real exports added .67 percentage points to 2nd quarter GDP in contrast to the first quarter export decrease which subtracted 0.81 percentage points from that quarter's GDP, while the 3.5% increase in real imports subtracted .54 percentage points from GDP, less than half of the 1.12 percentage points that imports subtracted in the 1st quarter...thus, our improving trade balance added a net 0.13% percentage points to 2nd quarter GDP, after a greater trade deficit subtracted 1.93 percentage points in the first quarter, and thus trade balance improvement by itself accounts for more than the entire improvement in the second quarter over the first..

finally, real consumption and investment by branches of government increased at a 0.8% annual rate after falling at a 0.1% rate in the first quarter as federal government consumption and investment fell at a 1.1% rate while state and local consumption and investment rose at a 2.0% rate.....inflation adjusted federal spending for defense fell at a 1.5% rate and subtracted 0.06 percentage points from 2nd quarter GDP growth, while real non-defense federal consumption and investment fell at a 0.5% rate and subtracted 0.01 percentage points from GDP...note that federal government outlays for social insurance are not included in this GDP component; rather, they are included within personal consumption expenditures only when such funds are spent on goods or services, indicating an increase in the output of goods or services....meanwhile, state and local government investment and consumption expenditures, which rose at a 2.0% annual rate, added 0.21 percentage points to the quarter's growth rate, asreal state and local investment rose at a 10.2% rate and accounted for 0.18 percentage points of that GDP addition...

our FRED bar graph below has been updated to include 2nd quarter GDP as well as the revisions to each of the GDP components from prior years resulting from this week's annual revision...each color coded bar shows the real change, in billions of chained 2009 dollars, in one of the major components of GDP over each quarter since the beginning of 2012...in each quarterly grouping of seven bars on this graph, the quarterly changes in real (ie, inflation adjusted) personal consumption expenditures are shown in blue, the changes in real gross private investment, including structures, equipment and intangibles, are shown in red, the quarterly change in private inventories is in yellow, the real change in imports are shown in green, the real change in exports are shown in purple, while the real change in state and local government spending and  investment is shown in pink, and the real change in Federal government spending and investment is shown in grey...those components of GDP that contracted in a given quarter are shown below the zero line and subtract from GDP, those that are above the line grew during that quarter and added to GDP; the exception to that is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so that when imports shrink, they will appear above the line as an addition to GDP, and when they increase, as they did in the recent quarter, they'll appear below the zero line...it’s fairly clear that our personal consumption expenditures has underpinned GDP growth over this period, while increasing imports has been the major negative…

2nd qtr 2015 advance GDP

New June Orders for Durable Goods Rise 3.4% on Aircraft Orders

June new orders for durable goods showed the largest increase since March on a big increase in Boeing jet orders booked at the Paris Air Show...the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf) from the Census Bureau reported that the widely watched new orders for manufactured durable goods rose in June by a seasonally adjusted $7.7 billion or 3.4% to $235.3 billion, following a May drop of 2.1% that was revised from the 1.8% decrease reported last month, and a 1.7% decrease in April's orders, which was revised the reported 1.5% drop...the value of new orders remained 2.0% below the level of a year earlier, but part of that decrease is likely due to falling prices in some durable goods, such as primary metals and fabricated metal products...as is usually the case, the monthly change in new orders for transportation equipment drove the headline changes, as they rose 8.9% to $78,364 million on a 66.1% increase to $17,211 million in new orders for commercial aircraft...excluding new orders for transportation equipment, new orders were up 0.8% to $156,973 million, as the important new new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, rose 1.0% to $69,136 million, after falling a revised 0.4% in May and 0.7% in April..

the seasonally adjusted value of June shipments of durable goods, which were inputs into 2nd quarter GDP after being adjusted for price changes, rose for the first time in 3 months, increasing $0.3 billion or 0.1 percent to $239.4 billion...again, higher shipments of transportation equipment drove the change, rising $0.4 billion or 0.5% to $77.5 billion, as shipments of defense aircraft rose 7.6%; excluding that volatile sector, other shipments of durable goods slipped by a statistically insignificant $48 million....meanwhile, the value of seasonally adjusted inventories of durable goods, also a GDP contributor, rose by $1.6 billion or 0.4% to $402.3 billion, after May's 0.2% drop in durable inventories was the first decrease in 24 months...$0.7 billion of the June inventory increase was a 0.5% increase to $130,804 million in inventories of transportation equipment, driven by an 0.8 increase in inventories of commercial aircraft; without that, other inventories rose 0.3% to $271,461 million.....

finally, unfilled orders for manufactured durable goods, which we consider a better measure of industry conditions than the widely watched but volatile new orders, rose for the first time in 3 months, increasing by $1.0 billion or 0.1 percent to $1,195.8 billion, again largely due to the increased backlog in orders for commercial aircraft, which rose 0.5% to $611,823, which you'll note is more than half the order backlog total...without the transportation equipment sector, unfilled orders were essentially unchanged in June, rising by $142 million to $396,333 million...nonetheless, unfilled orders for durable goods remained 4.7% higher than a yearago, with only orders for primary metals, machinery and defense goods seeing a year over year decrease in their order backlog...

May Case Shiller National Home Price Index is 4.4% Higher Than a Year Ago

the Case-Shiller house price indexes for May, released as usual on the last Tuesday of the month, indicated a 4.7% year overyear increase in prices on repeat home sales in the original ten cities covered, a 4.9% annual increase in the 20 city Composite, and a 4.4% increase in home prices nationally since the May report of last year....they also report a 'monthly' increase of 1.1% increase in all three of their major indices, but since the month over month figures for this report are comparing prices of houses sold in March, April and May to those sold in February, March, and April, the change in the month over month indexes is in effect equal to 1/3rd the difference between May prices and February prices, logically a seasonal increase at this time of year, which they acknowledge in indicating that with seasonal adjustment, the national index would be unchanged, and the 10 and 20 city indices would be down 0.2% from the previous report...thus, while all 20 cities showed an increase in home prices from last month's report, after seasonal adjustment, 10 were down, eight were up, and two were unchanged...the full pdf of the release is here and it includes full unadjusted and adjusted tables for all 20 cities and the 3 indexes, as well as graphs and commentary....for coverage of this Case-Shiller report on the web, Bill McBride has two posts, which include several graphs: Case-Shiller: National House Price Index increased 4.4% year-over-year in May, followed by his analysis in Real Prices and Price-to-Rent Ratio in May, while Robert Oak has several excellent graphics in his thorough post titled Case-Shiller Indices Show Home Prices Clearly Outpace Inflation….

(the above is the synopsis that accompanied my regular sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in receiving my weekly emailing of selected links, most from the aforementioned GGO posts, contact me…)

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