Sunday, July 3, 2016

1st quarter GDP revision, May income and outlays, May construction spending, et al

  the key economic releases of the past week were the 3rd estimate of 1st quarter GDP from the Bureau of Economic Analysis, and the May report on Personal Income and Spending also from the BEA, which includes 2 months of data on personal consumption expenditures and hence accounts for 46% of 2nd quarter GDP...also impacting 2nd quarter GDP, the week saw the release of the May report on Construction Spending from the Census Bureau...other widely watched releases included the Case-Shiller house price indexes for April from S&P Case-Shiller, which saw their national home price index rise 5.0% from the same month's report a year ago, and light vehicle sales for June from Wards Automotive, which estimated that vehicles sold at a 16.61 million annual rate in June, down 4.5% from the 17.39 million annual rate in May, and down 1.6% from the same month a year ago...

in addition, the week also saw the release of several manufacturing diffusion indexes for June, with indexes generated from business surveys that weigh the positive responses of executives against the negative ones...those included the Texas area manufacturing survey from the Dallas Fed, which reported its broadest general business activity index rose from -20.8 to -18.3, the 18th consecutive month of recession level readings in the oil patch economy; 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 fell from -1 in May to -7 in June, after a +14 reading in April, suggesting a return to contraction in that region's manufacturing; the Chicago Business Barometer for March from the ISM Chicago (pdf) which increased by 7.5 points to 56.8 in June from 49.3 in May, led by increases in new orders and production, where readings above 50 suggest growth, and the June Manufacturing Report On Business from national the Institute for Supply Management (ISM), which saw the manufacturing PMI (Purchasing Managers Index) rise from 51.3% in May to 53.2% in March, indicating that a larger plurality of manufacturing purchasing managers nationally saw growth in the various facets of their business for the 4th month in a row...

1st Quarter GDP Revised to Show Growth at a 1.1% Rate on Deflator Revision

the Third Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services increased at a 1.1% annual rate in the quarter, revised from the 0.8% growth rate reported in the second estimate last month, as non-residential fixed investment fell less than was previously reported, our exports increased, rather than decreased, and prices indices for all components of GDP were revised lower...in current dollars, our first quarter GDP grew at a 1.4% annual rate, same as was reported in the 2nd estimate, increasing from what would extrapolate to $18,164.8 billion annually in the 4th quarter to an annualized $18,230.1 billion in the 1st quarter, with the headline 1.1% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging less than 0.4%, revised from 0.6%, was applied to the current dollar change...

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 the prefix "real" is used to indicate that each change has been adjusted for inflation using price changes chained from 2009....all percentage changes in this report are then calculated from those 2009 dollar figures, which would be better thought of as a quantity indexes than as any reality based dollar amounts...given the misunderstanding evoked by the press release, all the data that we'll use in reporting the changes here will come from the pdf for the 3rd estimate of 1st 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 the 2nd quarter of 2012, table 2, which shows the contribution of each of the components to the GDP figures for those quarters 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 2nd estimate for the 1st quarter, which this estimate revises, is here...

real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 1.5% annual rate in the 1st quarter, rather than the 1.9% growth rate reported last month, as a 1.7% increase in the rate of personal spending was deflated with an annualized 0.2% increase in the PCE price index, an inflation adjustment which was revised from the 0.3% PCE price index reported in the second estimate....real consumption of durable goods fell at a 1.6% annual rate, which was revised from the 1.2% decrease shown in the second estimate, and subtracted 0.12 percentage points from GDP, as a drop in consumption of automobiles & parts at a 12.3% rate more than offset an increase in real consumption of recreational goods and vehicles at a 9.6% rate, while growth in consumption of other durable goods was down as well...real consumption of nondurable goods by individuals rose at a 1.2% annual rate, revised from the 1.3% increase reported in the 2nd estimate, and added 0.15 percentage points to 1st quarter growth, as relatively large increases in real consumption of both food and energy goods offset small decreases in real consumption of clothing and other non-durable goods....meanwhile real consumption of services rose at a 2.1% annual rate, revised from the 2.6% rate reported last month, and added 0.99 percentage points to the final GDP tally....recreational services, transportation services and financial services, which had all been reported growing in the 2nd estimate, were all revised to show slight contraction with this release...

seasonally adjusted real private domestic investment contracted at a 1.8% annual rate in the 1st quarter, revised from the 2.8% contraction estimate made last month, as the contraction in real private fixed investment was revised from a 1.5% rate to a 0.4% rate, while the contraction in inventory growth was largely unchanged from the 2nd estimate...the contraction in investment in non-residential structures was revised from shrinking at a 8.9% rate to a contraction at a 7.9% rate, investment in equipment contracted at a 8.7% rate, not the 9.0% rate previously reported, and investment in intellectual property products, which had previously been estimated to be shrinking at a 0.1% rate, was revised to show growth at a 4.4% rate...meanwhile, growth in residential investment was revised lower, from growth at a 17.1% rate to growth at an 15.6% annual rate…after those revisions, the contraction in investment in non-residential structures subtracted 0.22 percentage points from the 1st quarter growth rate, lower investment in equipment subtracted 0.54 percentage points from 1st quarter growth, while the increase in investment in intellectual property added 0.18 percentage points and the growth in residential investment added 0.52 percentage points to 1st quarter GDP...

meanwhile, the growth in real private inventories was revised from the previously reported $69.6 billion real growth rate to show inventory grew by an inflation adjusted $68.3 billion rate in the 1st quarter.…that followed inventory growth at an inflation adjusted $78.3 billion rate in the 4th quarter, and hence the $10.0 billion smaller real inventory growth in the 1st quarter subtracted 0.23 percentage points from the quarter's growth rate, which was unchanged from the second estimate....since slower growth in inventories indicates that less of the goods produced during the quarter were being left "sitting on the shelf”, their quarter over quarter decrease by $10.0 billion meant that real final sales of GDP were relatively greater by that much, and hence real final sales of GDP grew at a 1.3% rate in the 1st quarter, revised from the 1.0% growth in real final sales reported in the 2nd estimate, but still down from real final sales growth at a 1.6% rate in the 4th quarter...

the previously reported decrease in our real exports was revised to an increase with this estimate, while the previously reported decrease in real imports was revised slightly higher, and as a result our net trade became an addition to GDP, rather than a subtraction as was previously reported...our real exports grew at a 0.3% rate, rather than shrinking at a 2.0% rate as was reported in the second 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 increase added 0.04 percentage points to the 1st quarter's growth rate....meanwhile, the previously reported 0.2% decrease in our real imports was revised to a 0.5% decrease, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their decrease conversely meant that 0.08 more percentage points were added to 1st quarter GDP....thus, our improving trade balance added a total of 0.12 percentage points to 1st quarter GDP, rather than the 0.21 percentage points subtraction from GDP that was indicated in the second estimate...

finally, there were only small revisions to real government consumption and investment in this 2nd estimate, as the real growth rate for the entire government sector was revised from growth at a 1.2% rate to growth at a 1.3% rate...real federal government consumption and investment was still seen to have shrunk at a 1.6% rate from the 4th quarter in this estimate, which was on net unrevised from the 1st estimate...real federal outlays for defense were revised to show shrinkage at a 3.7% rate, revised from the 3.6% rate previously reported, and subtracting 0.16% percentage points from 1st quarter GDP, while all other federal consumption and investment grew at a 1.6% rate, which was unrevised, and added 0.04 percentage points to GDP, just as before.....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...in addtion to federal outlays, real state and local consumption and investment grew at a 3.2% rate in the quarter, which was revised from a 2.9% rate in the 2nd estimate, and added 0.34 percentage points to 1st quarter GDP...

our FRED bar graph below has been updated with these latest GDP revisions...each color coded bar shows the real inflation adjusted change, expressed in billions of chained 2009 dollars, in one of the major components of GDP over each quarter since the beginning of 2013...in each quarterly grouping of seven bars on this graph, the quarterly changes in real 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 real 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, they'll appear below the zero line...it’s fairly clear from this graph that the weak growth in the first quarter was due to the smallest increase in real personal consumption expenditures in 2 years, combined with little contribution from other sectors of the economy other than state and local governments, as shown in pink below…  

1st quarter 2016 GDP 3rd estimate

May Personal Income up 0.2%; 2 Months PCE Would Add 2.66 Percentage Points to Q2 GDP

the May report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for more than 2/3rds of GDP, and the PCE price index, the inflation gauge the Fed targets, and 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 same 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 amounts at an annual rate, ie, they tell us how much income and spending would increase for a year if May's adjusted income and spending were extrapolated over an entire year...however, the percentage changes are computed monthly, from one month's annualized figure to the next, and in this case of this month's report they give us the percentage change in each annualized metric from April to May....

therefore, when the opening line of the press release for this report tell us "Personal income increased $37.1 billion, or 0.2 percent, and disposable personal income (DPI) increased $33.9 billion, or 0.2 percent, in May", they mean that the annualized figure for seasonally adjusted personal income in May, $15,896.7 billion, was $37.1 billion, or somewhat more than 0.2% greater than the annualized  personal income figure of $15,859.7 billion for April; the actual, unadjusted change in personal income for April to May is not given...similarly, annualized disposable personal income, which is income after taxes, also rose by more than 0.2%, from an annual rate of an annual rate of $13,857.1 billion in April to an annual rate of $13,891.1 billion in May...all the contributors to the increase in personal income, listed under "Compensation" and "Other Personal Income" in the press release, are also annualized amounts, which can be more clearly seen in the Full Release & Tables (PDF) for this release...so when the press release, or a news account copying from it says, "Wages and salaries increased $14.7 billion in May, compared with an increase of $40.4 billion in April.", that really means wages and salaries would rise by $14.7 billion over an entire year if May's seasonally adjusted increase in wages and salaries were extrapolated over that year, just as personal current transfer payments from government agencies rose at a $4.8 billion annual rate and interest and dividend income, sometimes the largest contributor to the monthly personal income increase, rose at a $9.7 billion annual rate in May....since the way the press release is written often leads to media reports that parrot those lines the same way the BEA wrote them, we favor referencing the pdf in reviewing this report...

for the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased at a $53.5 billion annual rate, or by a bit more than 0.4 percent, as the annual rate of PCE rose from $12,645.9 billion in April to $12,699.4 in May; that happened as the April PCE figure was revised up slightly from the originally reported $12,645.8 billion annually and March PCE was revised down from $12,526.5 billion to $12,504.7 billion, and prior months were slightly revised as well, all of which was already captured by the 3rd estimate of 1st quarter GDP....the current dollar increase in May spending resulted from a $20.8 billion annualized increase to an annualized $4,070.9 billion annualized in spending for goods, and a $32.7 billion increase to $8,628.5 billion in annualized spending for services....total personal outlays for May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $57.0 billion to $13,160.4 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $730.6 billion annual rate in May, down a bit from the revised $753.7 billion annualized personal savings in April... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 5.3% in May from April's savings rate of 5.4%...

as you know, 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....the BEA does that by computing a price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, and which is included in Table 9 in the pdf for this report...that index rose from 110.247 in April to 110.431 in May, a month over month inflation rate that's statistically 0.1669%, which BEA reports as an increase of 0.2 percent, following the PCE price index increase of 0.3% they reported for April...applying that inflation adjustment to the nominal amounts of spending left real PCE up 0.3% in May, after the April real PCE increase was revised from 0.6% to 0.8% ...notice that when those price indexes are applied to a given month's annualized PCE in current dollars, it yields that month's annualized real PCE in our familiar chained 2009 dollars, which are the means that the BEA uses to compare one month's or one quarter's real goods and services produced to another....that result is shown in table 7 of the PDF, where we see that May's chained dollar consumption total works out to 11,500.2 billion annually, 0.2554% more than April's 11,470.9 billion, a difference that the BEA reports as 0.3%...

however, to estimate the impact of the change in PCE on the change in GDP, the month over month changes don't help us much, since GDP is reported quarterly...thus we have to compare April and May's real PCE to the the real PCE of the 3 months of the first quarter....while this report shows PCE for all those amounts monthly, the BEA also provides the annualized chained dollar PCE for those three months in table 8 in the pdf for this report, where we find that the annualized real PCE for the 1st quarter was represented by 11,372.9 billion in chained 2009 dollars..(that's the same as is shown in table 3 of the pdf for the revised 1st quarter GDP report)....then, by averaging the annualized chained 2009 dollar figures for April and May, 11,470.9 billion and 11,500.2 billion, we get an equivalent annualized PCE for the two months of the 2nd quarter that we have data for so far....when we compare that average of 11,485.6 to the 1st quarter real PCE of 11,372.9, we find that 2nd quarter real PCE has grown at a 4.02% annual rate for the two months of the 2nd quarter we have...(note the math to get that annual rate: (((11,470.9 + 11,500.2) /2) / 11,372.9) ^ 4 = 1.040213...that's a pace that would add 2.66 percentage points to the growth rate of the 2nd quarter by itself, even if there is no improvement in June PCE from that average...

Construction Spending Decreased 0.8% in  May after Prior Months Revised Higher

the Census Bureau report on construction spending for May (pdf) estimated that May's seasonally adjusted construction spending would work out to $1,143.3 billion annually if extrapolated over an entire year, which was 0.8 percent (±1.3%)* below the revised annualized estimate of $1,152.4 billion of construction spending in April but still 2.8 percent (±1.6%) above the estimated annualized level of construction spending in May of last year...as a result of an annual revision, the April spending estimate was revised 1.6% higher, from $1,133.9 billion to $1,152.4 billion, while the annual rate of construction spending for March was revised from $1,155.1 billion to $1,176.4 billion, and the annual rate of February construction spending was revised up from $1,137.9 billion to a $1,157,7 billion rate...combined, the revisions to February and March construction spending would suggest that 1st quarter GDP, which had been released 3 days earlier, will be revised higher when annual revisions to GDP are released in early August...construction spending tor the first 5 months of 2016 has now amounted to $438.5 billion, 8.2 percent (±1.3%) above the $405.4 billion in construction spending for the same 5 months of 2015..

private construction spending was at a seasonally adjusted annual rate of $859.3 billion in May, 0.3 percent (±1.0%)* below the upwardly revised April estimate of $861.9 billion, with residential spending of $451.9 billion statistically unchanged (±1.3%)* from the upwardly revised annual rate of $446.3 billion in April, while private non-residential construction spending fell 0.7 percent (±1.0%)* to $407.4 billion from the revised April level on a 4.5% decrease in private spending for construction of educational facilities and a 10.4% decrease in construction spending for religious facilities...at the same time, public construction spending was estimated to be at an annual rate of $284.0 billion, 2.3 percent (±2.6%)* below the revised April estimate of $290.5 billion, with public spending for education down 5.4 percent (±7.2%)* to an annual rate of $66,774 billion...

construction spending inputs into 3 subcomponents of GDP; investment in private non-residential structures, investment in residential structures, and into government investment outlays, for both state and local and Federal governments.... however, gauging the impact of revised April and May construction spending here on GDP is not as straightforward as the PCE computation, where all the inflation adjusted metrics are included in the report...adjusting construction for price changes is no easy matter, either....the National Income and Product Accounts Handbook, Chapter 6 (pdf), lists a multitude of privately published deflators that are used by the BEA for the various components of non-residential investment, such as the Turner Construction building-cost indices for several types of buildings and the Engineering News Record construction cost index for utilities construction, plus use of the Census Bureau construction price indexes for new one-family houses under construction and for new multi-family homes under construction for residential investment...so for a quick estimate, we've decided to use the producer price index for final demand construction as an inexact adjustment for aggregate construction cost changes…that index showed that construction costs were up 0.1% in May, up 0.8% in April, up 0.1% in March and down 0.2% in February and down 0.4% in January...construction spending totals for those same months, in that order and in millions of dollars, were 1,143,257, 1,152,363, 1,176,380, 1,157,704, and 1,144,928, a fairly obvious quarter over quarter contraction...since we want to know the inflation adjusted rate of contraction, then, our calculation becomes (1+ (1 -((1,143,257 + 1.001 * 1,152,363)/2) / ((1.009 * 1,176,380 + 1.010 * 1,157,704 + 1.008 *1,144,928) / 3)) )^4, indicating that construction spending has been shrinking at a 7.6% annual rate thus far in the second quarter...if June shows no improvement, that contraction in construction would be enough to subtract  0.52 percentage points from 2nd quarter GDP in those components that it influences...



(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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