Sunday, February 28, 2016

4th quarter GDP revision, January’s income and outlays, durable goods, new and existing home sales, and December Case-Shiller HPI

it's been a pretty busy week....the key reports were the 2nd estimate of 4th quarter GDP and the January report on Personal Income and Spending, both from the Bureau of Economic Analysis, which were both released on Friday...other widely watched reports released earlier in the week included the January advance report on durable goods and the January report on new home sales, both from the Census bureau, the January report on existing home sales from the National Association of Realtors, and the December Case-Shiller Home Price Index, which is actually a 3 month average of the change in price for homes that resold in October, November and December...also released this week was the Chicago Fed National Activity Index (CFNAI) for January, which is a weighted composite index of 85 different economic metrics, constructed such that a zero value indicates economic growth at the historical trend rate; the CFNAI rose to rose to +0.28 in January, up from −0.34 in December, which still left the 3 month average at -0.15, indicating that national economic activity has been somewhat below its historical trend...the week also saw two more regional Fed manufacturing surveys: the Richmond Fed February Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported its broadest composite index fell to -4, following last month's reading of +2, indicating that the region's manufacturing has begun to slow down in February, while the Kansas City Fed manufacturing survey for February, which covers western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, reported its broadest composite index fell to -12 in February from readings of -9 in both January and December, the lowest since 2009, indicating that their regional contraction, mostly in energy related industries, continues for the twelfth month in a row...

4th Quarter GDP Revised to Show Growth at a 1.0% Rate

against expectations of a downward revision,  the Second Estimate of our 4th Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 1.0% rate in the 4th quarter, revised up from the 0.7% growth rate reported in the advance estimate last month, as growth in private inventory investment decreased less than previously estimated and imports were revised lower, more than offsetting downward revisions in consumer spending for goods, private investment in structures, and in state and local government investment....in current dollars, our fourth quarter GDP grew at a 2.0% annual rate, increasing from what would work out to be a $18,060.2 billion a year output rate in the 3rd quarter to a $18,148.4 billion annual rate in the 4th quarter, with the headline 1.0% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 0.9%, aka the GDP deflator, was applied to the current dollar change...

while we cover the details below, remember that the press release for the 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 which 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 artificial 2009 dollar figures, which we think would be better thought of as representing quantity indexes...given the misunderstanding evoked by the text of the press release, all the data that we'll use in reporting the changes here comes directly from the pdf for the 2nd estimate of 4th quarter GDP, which is linked to on the sidebar of the BEA press release...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 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; table 4, which shows the change in the price indexes for each of the components; and table 5, which shows the quantity indexes for each of the components, which are used to convert current dollar figures into units of output represented by chained dollar amounts...the pdf for the 4th quarter advance estimate, which this estimate revises, is here...

real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 2.0% annual rate in the 4th quarter, rather than the 2.2% growth rate reported last month…that figure was arrived at by deflating the dollar amount of consumer spending with the PCE price index, which indicated inflation at a 0.4% annual rate in the 4th quarter, which was revised from the 0.1% inflation rate that was applied to PCE in the first estimate, sp hence this revision to PCE is more about the inflation adjustment than it is about consumer spending...real consumption of durable goods grew at a 1.9% annual rate, which was revised from 2.4% in the advance report, and added 0.42 percentage points to GDP, as real output of recreational equipment and vehicles consumed rose at a 13.3% annual rate even as real consumption of automotive vehicles decreased at a 4.6% rate.....real consumption of nondurable goods by individuals rose at a 1.2% annual rate, revised from the 1.5% increase reported in the 1st estimate, and added 0.17 percentage points to 4th quarter economic growth, as lower consumption of food and energy goods were a drag on non-durables growth, while consumption of services rose at a 2.1% annual rate, revised from the 2.0% rate reported last month, and which added 0.96 percentage points to the final GDP tally...an increase at a 3.6% rate in the real output of health care services led the services increase, while real outlays for housing and utilities shrunk at a 1.4% rate and subtracted 0.18 percentage points from 4th quarter growth, due to much warmer than normal weather in November and December.....

seasonally adjusted real gross private domestic investment contracted at a 0.7% annual rate in the 4th quarter, revised from the 2.5% shrinkage estimate made last month, as real private fixed investment was revised from growth at a 0.2% rate to growth at a 0.1% rate, while the contraction in inventory growth was much smaller than previously estimated...growth in investment in non-residential structures was revised down, however, from shrinking at rate of 5.3% to shrinking at a 6.6% growth rate, and the 4th quarter's investment in intellectual property products was revised from growth at a 1.6% rate to growth at a 1.3% rate...on the other hand, real investment in equipment was revised to show contraction at a 1.8% rate, a positive revision from the 2.5% contraction rate previously reported, and the growth rate of residential investment remained strong, with growth barely revised from 8.1% to 8.0% annually…after those revisions, the decrease in investment in non-residential structures subtracted 0.18 percentage points from the 4th quarter's growth rate, investment in intellectual property added 0.05 percentage points, while investment in equipment subtracted 0.11 percentage points from growth, and growth in residential investment added 0.26 percentage points to 4th quarter GDP...

meanwhile, the growth in real private inventories was revised from the originally reported $68.6 billion in real growth to show inventory growth at an inflation adjusted $81.7 billion rate, which came after inventories had grown at an inflation adjusted $85.5 billion rate in the 3rd quarter, and hence the $3.8 billion smaller real inventory growth than in the 3rd quarter subtracted 0.14 percentage points from the 4th quarter's growth rate, in contrast to the 0.45 percentage point subtraction due to slower inventory growth reported in the advance estimate....since less growth in inventories indicates that less of the goods produced during the quarter were left "sitting on the shelf”, their decrease by $3.8 billion meant that real final sales of GDP were actually greater by that much, and hence real final sales of GDP grew at a 1.2% rate in the 4th quarter, which was actually unchanged from the advance estimate, compared to the real final sales increase at a 2.7% rate in the 3rd quarter, when the change in inventories was larger, and thus 0.7% was added to GDP to arrive at the real final sales growth rate for the quarter...

the previously reported decrease in real exports was revised slightly lower with this estimate, but the reported increase in real imports was revised to show a decrease, and as a result our net trade was a smaller subtraction from GDP rather than was previously reported...our real exports fell at a 2.7% rate rather than the 2.5% rate reported in the first estimate, and since exports are added to GDP because they are part of our production that was not consumed or added to investment in our country, their shrinkage subtracted 0.34 percentage points from the 4th quarter's growth rate....meanwhile, the previously reported 1.1% increase in our real imports was revised to a 0.6% decrease, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their shrinkage added 0.09 percentage points to 4th quarter GDP....thus, our still weakening trade balance subtracted a net 0.25% percentage points from 4th quarter GDP, rather than the 0.47% percentage points subtraction from foreign trade that was indicated in the advance estimate..

finally, there was also a downward revision to real government consumption and investment in this 2nd estimate, as the real growth rate for the entire government sector went from a positive 0.7% to a negative 0.1% rate...real federal government consumption and investment was seen to have grown at a 2.2% rate from the 3rd quarter in this estimate, revised from the 2.7% growth rate of the federal government previously reported...real federal spending for defense was revised to show it growing at a 2.7% rate, rather than the 3.6% growth rate previously reported, still adding 0.11% percentage points to 4th quarter GDP, while all other federal consumption and investment grew at a 1.5% rate, rather than the 1.4% growth rate previously reported, and added 0.04 percentage points to 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 those goods or services, as even helicopter money would not add to GDP...meanwhile, real state and local consumption and investment was revised from shrinking at a 0.6% rate in the first estimate to a contraction at a 1.4% rate in this estimate, as state and local investment spending fell at a 9.2% rate and subtracted 0.19 percentage points from 4th quarter GDP, while state and local consumption spending grew at a 0.3% rate and added 0.03 percentage points to GDP...

in our FRED bar graph below, 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, or 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 subtracted 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 have in the recent quarter, they'll appear below the zero line...you can clearly see that the major contribution to GDP growth in the 4th quarter came as a result of increased real personal consumption in blue, while lower exports (purple) and lower real state and local consumption and investment (pink) were the major subtractions from 2015 Q4 growth...

4th quarter 2015 GDP 2nd estimate

Personal Income and Spending Both up 0.5% in January; Q1 PCE growth already tops 4th Quarter

as you can see from the GDP chart above, our personal consumption expenditures (PCE) are usually the key metric for determining the ultimate trajectory of GDP each quarter, and hence the key monthly release that inputs into GDP each quarter would usually be the report on Personal Income and Outlays from the Bureau of Economic Analysis, which gives us the monthly data on our personal consumption expenditures (PCE) and the PCE price index, which is used to adjust that personal spending data for inflation to give us the relative change in the output of goods and services that our spending indicated...this report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate...however, because this report feeds in to GDP and other national accounts data, the change reported for each of those are not the current monthly change; rather, they're seasonally adjusted and at an annual rate, ie, in today’s case they tell us what income and spending would be for a year if January's adjusted income and spending were extrapolated over an entire year...however, the percentage changes are computed monthly, and in this case of this month's report they give us the percentage change in each annual metric from December to January...

for example, when the opening line of the press release for this report tell us "Personal income increased $79.6 billion, or 0.5 percent, and disposable personal income (DPI) increased $63.5 billion, or 0.5 percent, in January", they mean that the annualized figure for personal income in January, $15,691.4 billion, was $79.6 billion, or a bit more than 0.5% greater than the annualized  personal income figure of $15,611.8 billion for December; the actual change in personal income from December to January is not given...similarly, annualized disposable personal income, which is income after taxes, rose by almost 0.5%, from an annual rate of an annual rate of $13,618.9 billion in December to an annual rate of $13,682.4 billion in January...likewise, all the contributors to the increase in personal income, listed under "Compensation" in the press release, are also annualized amounts, all of which can be more clearly seen in the Full Release & Tables (PDF) for this release...so when the press release says, "Wages and salaries increased $48.1 billion in January, compared with an increase of $18.3 billion in December" that really means wages and salaries would increase by $48.1 billion over an entire year if January's seasonally adjusted increase in wages and salaries were extrapolated over that year, just as interest and dividend income rose at a $11.6 billion annual rate in January, and personal current transfer receipts, the largest contributor to the December income increase, rose at a $10.6 billion annual rate in January...so you can see what's written in the press release is confusingly misleading, and often leads to media reports that parrot those lines the same way the BEA wrote them...

for the January personal consumption expenditures (PCE) that will be included in 1st quarter GDP, BEA reports that they increased by $63.0 billion, or 0.5%, which means the rate of personal consumption expenditures rose from $12,457.3 billion annually in December to $12,520.4 billion annually in January; in addition, the December PCE figure was revised up from the originally reported $12,448.3 billion annually...however, before personal consumption expenditures are used in the GDP computation, they must first be adjusted for inflation to give us the real change in consumption, and hence the real change in goods and services that were produced for that consumption....that's done with the price index for personal consumption expenditures, which is included in Table 9 in the pdf for this report, which is a chained price index based on 2009 prices = 100....that index rose from 109.843 in December to 109.956 in January, giving us a month over month inflation rate of 0.103%, which BEA rounds to a 0.1% increase in reporting it....applying that 0.1% inflation adjustment to the increase in January PCE leaves real PCE up 0.4032% in January, which the BEA reports as a 0.4% increase...comparing the annualized January real PCE of 11,387.0 in chained 2009 dollars from Table 7 of this release to the annualized real PCE of 11,319.3 in chained dollars that was reported in table 3 of the 4th quarter GDP revision, we find that real PCE is already growing at a 2.41% annual rate so far in the 1st quarter, or at a pace that is already better than we saw for PCE growth in the 4th quarter, such that if it were continued in February and March, would add 1.66 percentage points to 1st quarter GDP...

with disposable personal income and personal consumption expenditures both up by 0.5%, there was little change in our personal savings for January from a month earlier...to arrive at the figures for that, the BEA takes total personal outlays, or the sum of PCE, personal interest payments, and personal current transfer payments, which was at $12,977.3 billion annual rate in January, and subtracts that from disposable personal income, to show personal savings growing at a $705.1 billion annual rate in January, down from the $709.2 billion that we would have ‘saved"’ over a year had December's savings been extrapolated for a year...this small decrease left the personal savings rate, or personal savings as a percentage of disposable personal income, at 5.2% in January, the savings rate as in December...

January Durable Goods New Orders up 4.9%, Shipments up 1.9%, Inventories Down 0.1%

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for January (pdf) from the Census Bureau reported that the widely watched new orders for manufactured durable goods increased by $11.1 billion or 4.9 percent to $237.5 billion in January, following a revised decrease of $11.0 billion, or 4.6%, in December new orders, which were originally reported as down 5.1% from November...this was only the second increase in new orders for durables in the last 6th months, but the value of year over year new orders have now turned positive, as they are 0.6% higher than a year ago......as is usually the case, the volatile monthly change in new orders for transportation equipment drove the January headline change, as those transportation equipment orders rose $8.2 billion or 11.5 percent to $79.7 billion, as a 54.2% increase to $14,483 million in new orders for commercial aircraft was coupled with 84.8% jump to $4,959 million in new orders for defense aircraft, reversing the December new orders drops in those industries....excluding those new orders for transportation equipment, other new orders still rose by 1.8% in January, as the important new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, rose 3.9% to $69,016 million, after the December change in orders for such capital goods was revised from a 4.3% decrease to a 3.7% decrease....

meanwhile, the seasonally adjusted value of January shipments of durable goods, which which will be inputs into various components of 1st quarter GDP after adjusting for deflation, rose by $4.6 billion, or 1.9 percent, to $241.9 billion, after December's shipments were revised from a drop of 2.2% to a decrease of 1.6% while November's shipments had increased 0.6%, unrevised...again, increased shipments of transportation equipment drove the change, as they rose $4.3 billion or 5.7 percent to $80.0 billion, as the value of shipments of commercial aircraft rose 30.7% to $14,173; excluding that volatile sector, the value of other shipments of durable goods rose 0.2% in January but still remains 1.0% lower than a year ago....meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, fell for the 6th time in 7 months, decreasing by $0.1 billion or 0.1 percent to $175.4 billion, following a 0.2% increase in December that was originally reported as a 0.5% increase...inventories of transportation equipment rose 0.5% to $132,014 million in January, while inventories ex-transport equipment fell 0.4%, mostly on a $0.7 billion or 2.0 percent decrease to $33.8 billion in inventories of primary metals...

finally, unfilled orders for manufactured durable goods, which we consider a better measure of industry conditions than the widely watched but volatile new orders, increased for the third time in four months, rising by $0.6 billion or 0.1 percent to $1,187.7 billion, after a 0.5% decrease in December which was essentially unrevised...an increase in unfilled orders for computers and electronic products, which have been up twenty-five consecutive months, drove the increase, as they rose by $0.7 billion or 0.5 percent to $137.2 billion....compared to a year ago, the unfilled order book for durable goods is still 1.7% below last January's level, with unfilled orders for transportation equipment 1.5% below their year ago level, on a 4.1% decrease in the backlog of orders for motor vehicles.....

New Homes Continue to Sell at a Half Million a Year Rate

the Census report on New Residential Sales for January (pdf) estimated that new single family homes were selling at a seasonally adjusted rate of 494,000 new homes a year in January, which was 9.2 percent (±13.5%)* below the revised December rate of 544,000 new single family homes a year, but still 9.9 percent (±25.0%)* above the estimated annual rate that new homes were selling at in January of last year....the asterisks indicate that based on their small sampling, Census could not be certain whether January new home sales rose or fell from those of December or even from those of a year ago, with the figures in parenthesis representing the 90% confidence range for reported data in this report, which has the largest margin of error and subject to the largest revisions of any census construction series....hence, these initial reports are not very reliable and often see significant revisions...with this report; sales new single family homes in November were revised from the annual rate of 491,000 reported last month to a 503,000 a year rate, while the annual rate of October's sales, revised from from from 470,000 to 482,000 last month, were now revised down a bit, to an annual rate of 480,000...

the annual rates of sales reported here are extrapolated from the estimates of Census field reps, which showed that approximately 37,000 new single family homes sold in January, down from the 38,000 new homes that sold in December, which was unrevised, while the unadjusted estimate for November home sales was revised from 34,000 to 35,000, and the estimate for October sales, first reported at 41,000, unrevised from last month's 39,000 estimate, after a earlier downward revision to 38,000.....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in January was $278,800, down from $295,800 in December, which was originally reported as $288,900, while the average new home sales price was $365,700, down from $364,200 in December, and down from the average sales price of $356,000 in January a year ago....a seasonally adjusted estimate of 238,000 new single family houses remained for sale at the end of January, which represents a 5.8 month supply at the January sales rate, up from a 5.2 month supply in December...for more details and graphics on this report, see Bill McBride's two posts, New Home Sales decreased to 494,000 Annual Rate in January and Comments on January New Home Sales...

Realtors Say January Home Prices Were Up 8.2% From a Year Earlier

the National Association of Realtors (NAR) reported that seasonally adjusted existing home sales rose by 0.4% in January, projecting that 5.47 million homes would sell over an entire year if January's home sales were extrapolated over that year, which was 11.0% greater than the annual sales rate projected in January of a year ago, making this the largest year-over-year gain since July 2013...that came after the annual rate of December home sales was revised down, from 5.46 million to 5.45 million...the NAR also reported that the median sales price for all existing-home types in January was $213,800, which was 8.2% higher than a year earlier and the 47th consecutive monthly year over year increase in home prices...the NAR press release, which is titled Existing-Home Sales Inch Forward in January, Price Growth Accelerates, is in easy to read plain English, so if you're interested in the details on housing inventories, cash sales, distressed sales, first time home buyers, etc., you can easily find them in that press release...as sales of existing properties do not add to our national output, neither these sales nor the prices for which these homes sell are included in GDP, except insofar as real estate, local government and banking services are rendered…

since this report is entirely seasonally adjusted and at a not very informative annual rate, we'll take a look at the raw data overview (pdf), which gives us a close approximation to the actual number of homes that sold each month...this indicates that roughly 302,000 homes sold in January, down 30.7% from the 436,000 homes that sold in December but up 7.5% from the 281,000 homes that sold in January of last year...home sales were down by nearly 30% in every region of the country, ranging from a 32.8% decrease to 39,000 home sales in the Northeast to a 29.8% decrease to 66,000 home sales in the Midwest, so you can see there was a large seasonal adjustment applied to arrive at the headline numbers....that same pdf indicates that the median home selling price for all housing types fell 4.2% from a revised $223,200 in December to $213,800 in January, while the average home sales price was $257,500, down 3.2% from the $266,100 average in December, but up 4.8% from the $245,800 average home sales price of January a year ago, with the regional average home sales prices ranging from a low of $196,900 in the Midwest to a high of $346,500 in the West...for additional coverage with long term graphs on this report, see Existing Home Sales increased in January to 5.47 million SAAR and A Few Comments on January Existing Home Sales by Bill McBride at Calculated Risk…

Case-Shiller Says December Home Prices Were Up 5.1% from a Year Ago

the Case-Shiller house price indexes for December indicated a 5.1% year over year increase in sales prices on repeat home sales in the ten cities of the original index, a 5.7% year over year increase in the 20 City Composite, and a 5.4% increase in home prices nationally since the December report of last year, led by an 11.4% increase in home prices in Portland, a 10.3% increase in home prices in San Francisco, and a 10.2% increase in home prices in Denver....Case-Shiller also reports a 'monthly' increase of 0.1% in the national index and no change in the 10 city and 20 city indexes, all of which compare prices of houses sold in September, October and November to those sold in October, November, and December, and hence the change in the month over month indexes are arithmetically equal to 1/3rd the difference between September home prices and December home prices, ie, not really a useful monthly change at all...seasonally adjusting those so called month over month indexes shows that the national index and the in 20 city index are 0.8% higher than last month's; thus, while home prices in 10 of the 20 cities showed an actual increase in December price indices when compared to those of September, after those seasonal adjustments were applied, home prices in all 20 of the cities increased...the full pdf of the release, titled Home Prices Marginally Increased in December, 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, see the following two posts from Bill McBride, which include several graphs: Case-Shiller: National House Price Index increased 5.4% year-over-year in December, followed by his analysis in Real Prices and Price-to-Rent Ratio in December....

as we mentioned, since Case-Shiller indexes are simple averages of home price changes over 3 months, they are not very useful for monthly comparisons...that's simply because two of the months are being compared to themselves, leaving only prices changes from the current month, and the month before the month before last left in each month over month comparison....this is also the case with any three month average, which we can represent by (a + b + c) / 3, with a being the current month, b being last month, and c being the month before that...another way of writing that same expression is "a/3 + b/3 + c/3 " .... when one compares that to the prior month 3 month average, represented by (b + c + d) / 3, where d is the month before the month before last, we end up comparing (a/3 + b/3 + c/3) to (b/3 + c/3 + d/3), and since two of our elements in that comparison are identical, the comparison simply becomes a/3 to d/3, or one-third the difference between months a and d....nonetheless, such 3 month averages are used by economists everywhere, including at the Fed, as if they're providing some special insight, even though the comparison they offer borders on nonsense...


(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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