Sunday, October 2, 2016

2nd quarter GDP, 3rd revision; August’s income and outlays, durable goods, and new home sales

the key economic releases of the past week were the 3rd estimate of 2nd quarter GDP from the Bureau of Economic Analysis, and the August report on Personal Income and Spending, also from the BEA, which includes 2 months of data on personal consumption expenditures and hence accounts for more than 46% of 3rd quarter GDP....other widely watched releases included the August advance report on durable goods and the August report on new home sales, both from the Census bureau, and the Case-Shiller Home Price Index for July, which is a relative average of May, June and July repeat sales home prices; and which reported that home prices nationally for those 3 months averaged 5.1% higher than prices for the same homes that sold during the same 3 month period a year earlier, unchanged from the 5.1% YoY increase shown in the prior report...

in addition, this week saw the release of the last two regional Fed manufacturing surveys for September: the Dallas Fed Texas Manufacturing Outlook Survey, which indicated its general business activity index rose from -6.2 in August to -3.7, still the 21st consecutive negative reading for that index, indicative of an ongoing recession in the Texas oil patch economy, and 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 -8 in September from -11 in August, also still suggesting continuing contraction for that region's manufacturing...

2nd Quarter GDP Revised to Indicate Growth at a 1.4% Rate

the Third Estimate of our 2nd Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services increased at a 1.4% annual rate in the quarter, revised from the 1.1% growth rate reported in the second estimate last month, as our exports increased more than was estimated then and private non-residential fixed investment increased, rather than decreased as was previously reported...in current dollars, our second quarter GDP grew at a 3.7% annual rate, up from the 3.4% reported in the 2nd estimate, increasing from what would extrapolate to $18,281.6 billion annually in the 1st quarter of this year to an annualized $18,450.1 billion in the 2nd quarter, with the headline 1.4% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 2.3%, aka the GDP deflator, was applied to the current dollar change...

recall 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 which actually occurred over the 3 month period, and that the prefix "real" is used to indicate that the change has been adjusted for inflation using prices chained from 2009, from which all percentage changes in this report are calculated, as they thus represent the change in the quantity of our goods and services output...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 3rd estimate of 2nd 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 3rd 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 quarter’s second estimate, which this estimate revises, is here...

growth of real personal consumption expenditures (PCE), the largest component of GDP, was fractionally revised from the 4.4% growth rate reported last month to a 4.3% rate in this 3rd estimate…that growth rate figure was arrived at by deflating the 6.38% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated inflation at a 2.0% annual rate in the 2nd quarter, which was statistically unrevised from the PCE inflation rate reported a month ago...real (inflation adjusted) consumption of durable goods grew at a 9.8% annual rate, which was revised from the 9.9% growth rate in the second estimate, and added 0.70 percentage points to GDP, as an increase in real consumption of recreational goods and vehicles at a 14.5% rate accounted for more than half the durables increase...real personal consumption of nondurable goods rose at a 5.7% annual rate, unchanged from the 2nd estimate, and added 0.80 percentage points to 2nd quarter economic growth, as all non-durable goods except energy goods, which were unchanged, saw higher consumption in the quarter….at the same time, consumption of services rose at a 3.0% annual rate, revised from the 3.1% growth rate reported last month, and added 1.37 percentage points to the final GDP tally, as real health care consumption rose at a 7.3% rate and accounted for nearly 60% of the 2nd quarter growth in services...

at the same time, seasonally adjusted real private domestic investment contracted at a 7.9% annual rate in the 2nd quarter, revised from the 9.7% contraction estimate made last month, as the contraction in real private fixed investment was revised from a 2.5% rate to a 1.1% rate, while the contraction in inventory growth was not quite as large as previously estimated...the contraction in fixed private investment was revised from shrinking at a 0.9% rate to growth at a 1.0% rate, as investment in non-residential structures was revised from shrinking at a 8.4% rate to shrinking at a 2.1% rate, investment in equipment was revised to shrinking at a 2.9% rate from the 3.6% rate previously reported, and investment in intellectual property products was revised from growth at a 8.6% rate to growth at a 9.0% rate...on the other hand, real residential investment was still shown to be shrinking at a 7.7% annual rate, unrevised from the second estimate…after those revisions, the decrease in investment in non-residential structures subtracted 0.06 percentage points from the 2nd quarter's growth rate, the decrease in investment in equipment subtracted 0.17 percentage points from growth, lower residential investment subtracted 0.31 percentage points from GDP, while growth in investment in intellectual property added 0.35 percentage points to 2nd quarter GDP...

in addition, investment in real private inventories fell by an inflation adjusted $9.5 billion in the 2nd quarter, revised from the previously reported $12.4 billion of inventory shrinkage...this came after inventories had grown at an inflation adjusted $40.7 billion rate in the 1st quarter, and hence the $50.2 billion quarter over quarter decrease in real inventory growth subtracted 1.16 percentage points from the quarter's growth rate, in contrast to the 1.26 percentage point subtraction due to slower inventory growth that was shown with the second estimate....since slower growth in inventories indicates that less of the goods produced during the quarter were left "sitting on the shelf”, their decrease by $50.2 billion meant that real final sales of GDP were relatively greater by that much, and hence real final sales of domestic products increased at a 2.6% 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 inventories was much smaller…

the previously reported increase in real exports was revised upward with this estimate, while the reported increase in real imports was revised a bit downward, and as a result the change in our net trade was a larger addition to GDP rather than was previously reported...our real exports grew at a 1.8% rate rather than the 1.2% rate reported in the 2nd 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 growth added 0.21 percentage points to the 2nd quarter's growth rate, up from the 0.14 percentage point addition shown in the previous report......meanwhile, the previously reported 0.3% increase in our real imports was revised to a 0.2% increase, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their smaller increase subtracted just 0.03 percentage points from 2nd quarter GDP....thus, our improving real trade balance added a net 0.18 percentage points to 2nd quarter GDP, rather than the 0.10% percentage point addition that had been indicated by the second estimate…

finally, there were downward revisions to real government consumption and investment in this 3rd estimate, as the entire government sector shrunk at a 1.7% rate, revised from the shrinking at a 1.5% rate previously reported...real federal government consumption and investment was seen to have shrunk at a 0.4% rate from the 1st quarter in this estimate, which was revised from the 0.3% contraction rate in the 2nd estimate...real federal outlays for defense were revised to show shrinkage at a 3.2% rate, rather than the 3.1% contraction rate previously reported, and subtracted 0.13% percentage points from 2nd quarter GDP, while all other federal consumption and investment grew at a 3.8% rate, which was unrevised, and added 0.10% percentage points to 2nd quarter GDP...meanwhile, real state and local consumption and investment shrunk at a 2.5% rate in the quarter, which was revised from the 2.2% contraction rate reported in the 2nd estimate, and subtracted 0.28% percentage points from 2nd quarter GDP....note that 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, thus indicating an increase in the output of those goods or services...

our FRED bar graph for GDP 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 therefore 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 it was only growth in our real personal consumption expenditures that contributed appreciably to 2nd quarter GDP, without which we would have seen a contraction…  

3rd estimate 2nd quarter 2016 GDP

August Personal Income up 0.2%; 2 Months PCE Would Add 1.68 Percentage Points to Q3 GDP

the August report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 3rd 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 report also gives us August's 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 metrics 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 August'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 July to August....

thus, when the opening line of the press release for this report tell us "Personal income increased $39.3 billion (0.2 percent) in August", they mean that the annualized figure for seasonally adjusted personal income in August, $16,049.3 billion, was $39.3 billion, or somewhat more than 0.2% greater than the annualized  personal income figure of $16,010.0 billion for July; the actual, unadjusted change in personal income for July to August 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 $14,043.8 billion in July to an annual rate of $14,075.7 billion in August....the monthly contributors to the increase in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also thus annualized...in August, the largest contributors to the $39.3 billion annual rate of increase in personal income were a $10.9 billion increase in interest and dividend income and a $10.3 billion increase in personal current transfer receipts…wages and salaries, on the other hand, only represented $8.8 billion of August's annualized increase in personal income...

for the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased at a $6.2 billion annual rate, or by less than 0.1 percent, as the annual rate of PCE rose from $12,796.1 billion in July to $12,802.3 in August; that happened as the July PCE figure was revised down slightly from the originally reported $12,797.6 billion annually and June PCE was revised down from $12,755.7 billion to $12,750.8 billion, and prior months were slightly revised as well, all of which was already included in the concurrent 3rd estimate of 2nd quarter GDP....the current dollar increase in August spending resulted from a $29.9 billion annualized increase to an annualized $8,714.4 billion annualized in spending for services, which was mostly offset by a $23.7 billion decrease to $4,087.9 billion in annualized spending for goods, as we saw evidence of in the August retail sales report....total personal outlays for August, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $6.1 billion to $13,268.0 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $807.6 billion annual rate in August, up a bit from the revised $781.9 billion annualized personal savings in July... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.7% in August from July's savings rate of 5.6%...

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 July to 110.858 in August, a month over month inflation rate that's statistically 0.1436%, which BEA reports as an increase of 0.1 percent, following the statistically unchanged PCE price index they reported for July...applying that August inflation adjustment to the nominal amount of spending left real PCE down 0.1% in August, after a real PCE increase of 0.3% in July ...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 August's chained dollar consumption total works out to 11,548.6 billion annually, 0.096% less than July's 11,559.7 billion, a difference that the BEA rounds and reports as -0.1%...

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 July and August's real PCE to the the real PCE of the 3 months of the second 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 2nd quarter was represented by 11,484.9 billion in chained 2009 dollars..(that's the same as what's shown in table 3 of the pdf for the revised 2nd quarter GDP report)....then, by averaging the annualized chained 2009 dollar figures for July and August, 11,559.7 billion and 11,548.6 billion, we get an equivalent annualized PCE for the two months of the 3rd quarter that we have data for so far....when we compare that average of 11,554.15 to the 2nd quarter real PCE of 11,484.9, we find that 3rd quarter real PCE has grown at a 2.43% annual rate for the two months of the 3rd quarter we have...(notice the math to get that annual growth rate: (((11,548.6 +11,559.7) / 2) / 11,484.9) ^4 = 1.024337 )...that's a pace that would add 1.68 percentage points to the growth rate of the 3rd quarter by itself, assuming there is no improvement in September PCE from that average...

August Durable Goods: New Orders Flat, Shipments Down 0.4%, Inventories Up 0.1%

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for August (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods fell by $0.1 billion to $226.9 billion in August, which is considered statistically unchanged from July...July's new orders were revised from the $228.9 billion reported last month to $227.0 billion, 3.6% greater than June's, rather than the 4.2% increase originally reported...year to date new orders are now 0.6% below those of 2015, vs the 0.9% year over year change we saw in this report last month, since August a year ago had seen a larger drop....the volatile monthly change in new orders for transportation equipment mitigated what would have otherwise been a 0.4% drop in orders, as new transportation equipment orders rose $0.5 billion or 0.6 percent to $78,123 million, on a 24.2% increase to $5,461 million in new orders for defense aircraft....defense held the aggregate up as well; excluding new orders for all defense equipment, other new orders were down 1.0% in August, as new orders for electrical equipment and appliances were down 2.5% to $9,598 million...meanwhile , new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, rose 0.6% to $63,319 million...

at the same time, the seasonally adjusted value of August's shipments of durable goods, which will be inputs into various components of 3rd quarter GDP after adjusting for changes in prices, fell by $0.8 billion or 0.4 percent to $231.7 billion, after July shipments were revised from a increase of 0.4% to virtually unchanged from June....a 1.1% decrease in shipments of transportation equipment was the cause of the August drop, as those shipments fell $0.9 billion or 1.1 percent to $79.9 billion...meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the 2nd time in a row after being down 6 months, increasing by $0.5 billion or 0.1 percent to $383.7 billion, after the increase in July inventories was revised from a 0.3% increase to a 0.4% increase...an increase in inventories of machinery were a major factor in the August inventory increase, as they rose $0.3 billion or 0.5 percent to $65.7 billion...

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 3rd consecutive month, falling by $1.5 billion or 0.1 percent to $1,123.4 billion, following a July decrease of 0.2%, which was revised from the previously reported 0.1% decrease...a $1.8 billion or 0.2 percent to $769.2 billion decrease in unfilled orders for transportation equipment was responsible for all of the decrease, as unfilled orders excluding transportation equipment rose 0.1% to $354,243 million....compared to a year earlier, the unfilled order book for durable goods is now 2.0% below the level of last August, with unfilled orders for transportation equipment 3.0% below their year ago level, largely on a 6.6% decrease in the backlog of orders for motor vehicles... 

New Home Sales Running ~20% Ahead of Last Year’s Pace

the Census report on New Residential Sales for August (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 609,000 new homes a year, which was 7.6 percent (±10.7%)* below the revised July rate of 659,000 new single family home sales a year but 20.6 percent (±14.8%) above the estimated annual rate that new homes were selling at in August of last year....the asterisk indicates that based on their small sampling, Census could not be certain whether August new home sales rose or fell from those of July, 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....with this report; sales new single family homes in July were revised from the annual rate of 654,000 reported last month to a 659,000 a year rate, which would confirm July’s home sales as the highest new homes sales rate in 9 years, while home sales in June, initially reported at an annual rate of 592,000 and revised to a 582,000 a year rate last month, were revised to a 579,000 a year rate with this report, and while May's annualized home sale rate, initially reported at a 551,000 rate and unrevised at a 572,000 rate last month, were revised down to a 566,000 rate with this release..

the annual rates of sales reported here are seasonally adjusted after extrapolation from the estimates of canvassing Census field reps, which indicated that approximately 50,000 new single family homes sold in August, down from the estimated 57,000 new homes that sold in July and the 52,000 that sold in June....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in  August was $284,000, down from the median sale price of $293,100 in July and down from the median of $300,200 in August a year ago, while the average August new home sales price was $353,600, up from $352,000 average sales price in July, and up from the average sales price of $348,800 in August a year ago....a seasonally adjusted estimate of 235,000 new single family houses remained for sale at the end of August, which represents a 4.6 month supply at the August sales rate, up from the reported 4.2 months of supply in July...

 

(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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