Sunday, July 31, 2016

2nd quarter GDP and annual revision, June durable goods and new home sales

the key economic release of the past week was the 1st, or advance estimate of 2nd quarter GDP from the Bureau of Economic Analysis, which was accompanied by an annual revision to national accounts data over the prior three years....the other widely watched releases of the past week included the June advance report on durable goods and the June report on new home sales, both from the Census bureau, and the Case-Shiller house price indexes for May from S&P Case-Shiller, which saw their national home price index remain 5.0% higher than the same month's report a year ago...in addition, this week saw the release of last three regional Fed manufacturing surveys for July: those were the Texas area manufacturing survey from the Dallas Fed, which reported its broadest general business activity index rose from -18.3 in June to –1.3 in July, still the 19th consecutive month of contractionary 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 rose to +10 in July from -10  in June, after a revised 0 in May and a +14 reading in April, suggesting a return to expansion in that region's manufacturing; and the Kansas City Fed manufacturing survey for July, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, which reported its broadest composite index fell to -6 in July, down from 2 in June and -5 in May, suggesting that the regional contraction, mostly in energy related industries, continues for the 17th month...and from the private sector, we had the Chicago Business Barometer for July from the ISM Chicago (pdf) which saw it's purchasing manager's index slip to 55.8 in July, after a 1½-year high of 56.8 in June, in an index where readings above 50 suggest growth...

Advance Estimate of 2nd Quarter GDP & Revisions From 2013 to Present

the Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis released on Friday included an annual revision to the past 3 years of GDP releases, revising previously published data from the first quarter of 2013 through the first quarter of 2016, which on net indicated that economic growth over the period from 2013 to 2015 was at a 2.2% annual rate, revised from the 2.1% composite annual growth previously published for that period of the recovery, which was still the weakest economic expansion since World War II...GDP growth for 2013 was revised from 1.5% to 1.3%; our growth rate for 2014 was revised from 2.6% to 3.0%, and our growth rate for 2015 was revised from 2.4% to 2.5%...

the first quarter of 2016, which had been revised to a growth rate of 1.1% when we reviewed it a month ago, has now been revised to show growth at a 0.8% rate… major components that were revised lower included residential fixed investment, which was revised from growth at a 15.6% rate to growth at a 7.8% rate, growth in real private inventory investment, which was revised from growth at a inflation adjusted $68.3 billion rate, to real growth at $40.7 billion rate, and a revision to exports, from growth at a 0.3% rate to contraction at a 0.7% rate....those downward revisions were partially offset by an upward revision to nonresidential fixed investment, from contraction at a 4.5% rate to shrinking at a 3.2% rate, an upward revision to personal consumption expenditures (PCE), from a 1.5% growth rate to growth at a 1.6% rate, an upward revision to state and local government spending, from growth at a 3.2% rate to growth at a 3.5% rate, a downward revision to imports (a negative for GDP), from decreasing at a 0.5% rate to decreasing at a 0.6% rate, and an upward revision to federal government spending, from contraction at a 1.6% rate to contraction at a 1.5% rate...thus the estimates for the 1st quarter of 2016 have gone from the initial estimate of growth at a 0.5% rate, to an 0.8% growth rate in the 2nd estimate, to a 1.1% rate of growth in the 3rd estimate, and finally back to growth at a 0.8% rate in this annual revision...

all of those revisions should leave you with the sense to take this initial advance estimate of 2nd quarter growth, which was released on Friday with some June data still not reported, 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 1.2% annual rate over the output of the 1st quarter of this year, which we have just seen was revised to show growth at a 0.8% rate...the BEA cautions that the source data is incomplete and also subject to revisions, which have now averaged +/-0.6% in either direction from the advance to the third estimate, and +/- 1.2% from the advance estimate to the final reading...note that June construction, international trade and inventory data have yet to be reported, and that information on the assumptions used for those reports and unavailable source data for this advance estimate is provided in a technical note that is posted with the news release...

while we cover the details on the 2nd quarter 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 quarters 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 in this release (ie, 1a, 1b, 2a, 2b,etc) give us the previously published data for each of those metrics going back to the 4th quarter of 2012, should anyone be interested in the finer details of the annual revision..

personal consumption expenditures (PCE), which accounts for nearly 69% of GDP, grew at a 6.1% rate in current dollars in the 2nd quarter, in contrast to the first quarter increase at a revised 1.9% rate, but once the inflation adjustments were made with the PCE price indices for each quarter, real PCE rose 4.2% in the 2nd quarter after rising 1.6% in the first...consumer spending for durable goods rose at a 6.1% rate, mostly on a jump in spending for recreational goods and vehicles, but since prices for those durable goods fell by 2.3%, real output of durable goods represented by that spending increased at a 8.4% rate...consumer spending for non durables rose at a 8.5% rate, but the PCE price index for non-durables was up 2.5%, mostly on higher energy prices, reducing real growth in consumption of non durables to a 6.0% rate...in a like manner, personal outlays for services were reduced by a 2.5% deflator to show real 2nd quarter growth in services was at a 3.0% rate...thus, with real growth in all components of personal consumption expenditures, real growth in output of consumer durable goods added 0.60 percentage points to the change in GDP, real growth in non-durable goods output for consumers added 0.85 percentage points to 2nd quarter GDP growth, and real growth in services provided to consumers added 1.35 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 fallen at a 3.3% annual rate in the 1st quarter as equipment investment and inventories fell, crashed at a 9.7 annual rate in the 2nd quarter, as investment in everything except intellectual property fell...real non residential fixed investment fell at a 2.2% annual rate as real investment in non-residential structures fell at a 7.9% rate and real investment in equipment fell at a 3.5% rate, while investment in intellectual property grew at 3.5% rate...so while real investment in intellectual property added 0.14 percentage points to the GDP growth rate, the decrease in real investment in non-residential structures and real investment in equipment subtracted 0.22 and 0.21 percentage points respectively...in addition, residential investment fell at a 6.1% rate, its first drop since the 1st quarter of 2014, and subtracted 0.24 percentage points from 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, in the first drop since the recession, investment in real private inventories fell by an inflation adjusted $8.1 billion in the 2nd quarter, after they had grown by an adjusted $40.7 billion in the 1st quarter, and as a result the $48.8 billion downward swing in inventory growth subtracted 1.16 percentage points from the 2nd quarter's growth rate, after a $16.2 billion decrease in inventory growth in the 1st quarter had subtracted 0.41 percentage points from that quarter's GDP growth...however, smaller inventories indicates that less of the goods produced during the quarter were being left "sitting on the shelf”, so their quarter over quarter decrease by $48.8 billion meant that real final sales of GDP were relatively 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 increase at a 1.2% rate in the 1st quarter, when the change in the increase in inventories was smaller..

after adjustment for higher export and import prices, real exports increased and real imports were slightly lower in the 2nd quarter, as our real exports of goods and services rose at a 1.4% rate in the second quarter, after falling at a 0.7% rate in the 1st quarter, while our real imports fell at a 0.4% rate in the 2nd quarter after falling at a 0.6% 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 .16 percentage points to 2nd quarter GDP, in contrast to the first quarter export decrease, which subtracted 0.09 percentage points from that quarter's GDP...on the other hand, since imports subtract from GDP, their decrease at a 0.4% rate conversely meant that 0.06 more percentage points were added to 2nd quarter GDP....thus, with an upward rounding of the sum, our improving trade balance added a total of 0.23 percentage points to 2nd quarter GDP, after a revised barely improved trade deficit added 0.01 percentage points in the first quarter..

finally, real consumption and investment by branches of government fell at a 0.9% annual rate in the 2nd quarter, after increasing at a 1.6% rate in the first quarter, as federal government consumption and investment fell at a 0.2% rate and state and local consumption and investment fell at a 1.3% rate.....inflation adjusted federal spending for defense fell at a 3.0% rate and that subtracted 0.12 percentage points from 2nd quarter GDP growth, while real non-defense federal consumption and investment rose at a 3.9% rate and added 0.11 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 goods or services....meanwhile, state and local government investment and consumption expenditures, which fell at a 1.3% annual rate, subtracted 0.14 percentage points from the quarter's growth rate, as real state and local investment fell at a 10.4% rate and accounted for 0.20 percentage points of GDP subtraction...

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 below 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 2013...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, as they did in the recent quarter, 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 that our personal consumption expenditures has underpinned GDP growth over this period, while increasing imports, and more recently falling inventory investment, have been the major negatives…in the 2nd quarter, on the far right, we see that our personal consumption expenditures was only major positive, while both fixed investment and inventory investment dragged GDP lower…

2nd qtr 2016 advance GDP

June Durable Goods: New Orders Down 4.0%, Shipments Up 0.4%, Inventories Down 0.2%

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for May (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods fell by $9.3 billion or 4.0% to $219.8 billion in June, following a revised drop of 2.8% in May new orders, which had been originally reported as a 2.2% decrease...year to date new orders are now statistically unchanged from those of 2015, vs the 1.7% year over year change we saw in this report last month...as is usually the case, the volatile monthly change in new orders for transportation equipment drove the June headline change, as those transportation equipment orders fell $8.5 billion or 10.5 percent to $72.2 billion, on a 58.8% decrease to $6,745 million in new orders for commercial aircraft....excluding new orders for transportation equipment, other new orders were still down 0.5% in June, as new orders for computers and electronic products were also down 2.2% to $23,606 million...at the same time, the important new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, were up 0.2% to $62,330 million...

the seasonally adjusted value of June's shipments of durable goods, which were inputs into various components of 2nd quarter GDP after adjusting for changes in prices, rose by $0.9 billion or 0.4 percent to $232.5 billion, after May shipments were revised from a decrease of 0.2% to an decrease of 0.3%....a 1.1% increase in shipments of transportation equipment drove the change, as such shipment rose $1.1 billion to $81.2 billion, as the value of shipments of motor vehicles rose 2.7% to $55,041 million...excluding that volatile sector, the value of other shipments of durable goods fell 0.2%, as new orders for nondefense capital goods excluding aircraft were down 0.4% to $62,762 million, which was reflected in the contractionary 2nd quarter GDP equipment investment figures...

meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, fell for the 11th time in 12 months, decreasing by $0.7 billion or 0.2 percent to  $381.5 billion, after May's inventories were revised from a 0.3% decrease to a 0.4% decrease...again, falling inventories of transportation equipment were the major factor in the inventory decrease, as they fell $1.1 billion or 0.9 percent to $123.0 billion, on a 2.2% decrease to $62,451 million in inventories of civilian aircraft...excluding the drop in inventories of transportation equipment, all other durable goods inventories increased 0.2% to $258,535 million...

finally, unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but volatile new orders, fell for the first time in four months, dropping by $9.7 billion or 0.9 percent to $1,127.9 billion, following a May increase that was revised from 0.2% to statistically unchanged...a $9.0 billion or 1.1 percent to $774.9 billion decrease in unfilled orders for transportation equipment was responsible for most of the decrease, but unfilled orders excluding transportation equipment were still down 0.2% to $353,029 million....compared to a year earlier, the unfilled order book for durable goods is now 1.9% below the level of last June, with unfilled orders for transportation equipment 2.7% below their year ago level, largely on a 5.7% decrease in the backlog of orders for motor vehicles... 

June New Home Sales Trending Above Those of a Year Ago

the Census report on New Residential Sales for June (pdf) estimated that new single family homes were selling at a seasonally adjusted rate of 592,000 new homes a year, which was 3.5 percent (±23.9%)* above the revised May rate of 572,000 new single family homes a year and 25.4 percent (±27.9%)* above the estimated annual rate that new homes were selling at in May of last year....the asterisks indicate that based on their small sampling, Census could not be certain whether June new home sales rose or fell from those of May or even from those in June 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 is subject to the largest revisions of any census construction series....since these initial new home sales reports are not very reliable and often see significant revisions, reports that new home sales were at an eight year high should be taken with a large grain of salt; April's reported 8 year high has since been revised away...with this report; sales new single family homes in May were revised from the annual rate of 551,000 reported last month to a 572,000 a year rate, April's annualized home sale rate, initially reported at 619,000, were revised from last months downward revision of 586,000 down to 572,000, while the annual rate of March's sales, revised from 531,000 to an annual rate of 522,000 last month, were now revised higher, to an annual rate of 537,000...

the annual rates of sales reported here are seasonally adjusted after extrapolation from the estimates of Census field reps, which showed that approximately 54,000 new single family homes sold in June, unchanged from the 54,000 new homes that sold in May but down from the 56,000 new homes that sold in April....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in June was $306,700, up from the median sale price of $288,800 in May, while the average June new home sales price was $358,200, up from $351,400 average in May, and up from the average sales price of $329,300 in June a year ago....a seasonally adjusted estimate of 244,000 new single family houses remained for sale at the end of June, which represents a 4.9 month supply at the June sales rate, down from the reported 5.3 month supply in May....for more details and graphics on this report, see Bill McBride's two posts, New Home Sales increased to 592,000 Annual Rate in June, Highest since 2008 and A few Comments on June New Home Sales...

 

(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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