Sunday, October 30, 2016

3rd quarter GDP, September durable goods and new home sales

the key economic release of the past week was the 1st estimate of 3rd quarter GDP from the Bureau of Economic Analysis; other widely watched releases included the advance report on durable goods for September and the September report on new home sales, both from the Census bureau, and the Case-Shiller Home Price Index for August, from S&P Case-Shiller…the latter is a relative average of June, July and August repeat sales home prices; and which reported that home prices nationally for those 3 months averaged 5.3% higher than prices for the same homes that sold during the same 3 month period a year earlier, up from the 5.1% YoY increase shown in the prior report...earlier, we saw the release of the Chicago Fed National Activity Index (CFNAI) for September, a weighted composite index of 85 different economic metrics, which rose to -0.14 in September from −0.72 in August, which was revised from the -0.55 reported last month....that left the 3 month average of the index at -0.21 in September, down from a revised –0.14 in August, which indicates that national economic activity has been somewhat below the historical trend over the summer months...

   in addition, this week also saw the release of two more regional Fed manufacturing surveys for October: the Richmond Fed 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 rose to -4 in October from -8 in September, still suggesting ongoing contraction in that region's manufacturing, and the Kansas City Fed manufacturing survey for September, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, which reported its broadest composite index remained unchanged at +6 in October, the first back to back expansionary readings for this region in two years, following a stretch of 18 months of contraction, mostly due to energy related pullbacks in this west central US region...

3rd Quarter Growth Rate at 2.9% Rate as Exports and Inventories Contribute

our economy grew at a 2.9% rate in the 3rd quarter, the fastest rate in 2 years, even as personal consumption slowed, as our exports rose at a double digit rate and the change in private inventories turned positive for the first time in 7 quarters, while both nonresidential investment and federal government consumption and investment outlays also increased...the Advance Estimate of 3rd Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US grew at a 2.9% annual rate over the output of the 2nd quarter of 2016, when our real output grew at a 1.4% real rate...in current dollars, our third quarter GDP grew at a 4.4% annual rate, increasing from what would work out to be a $18,450.1 billion a year output rate in the 2nd quarter to a $18,651.2 billion annual rate in the 3rd quarter, with the headline 2.9% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 1.5%, aka the GDP deflator, was applied to the current dollar change... as usual with an advance estimate, the BEA cautions that the source data is incomplete and also subject to revisions, which have now averaged +/-0.7% in either direction for nominal GDP, and +/- 0.6% for real (inflation adjusted) GDP before the third estimate for the quarter is released, which will be two months from now...also note that September construction and inventory data have yet to be reported, and that the BEA assumed a small increase in nonresidential construction, a small decrease in residential construction, and a decrease in nondurable manufacturing inventories for September before they estimated 3rd quarter output..

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 2009 dollar figures, which we think would be better thought of as representing quantity indexes...given the misunderstanding evoked by the press release, all the data that we'll use in reporting here comes from the pdf for the 1st estimate of 3rd quarter GDP, which is linked to on the sidebar of the BEA’s 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 the 4th 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 GDP components, which are used to convert current dollar figures into units of output represented by chained dollar amounts...

personal consumption expenditures (PCE), which accounts for over 68% of GDP, grew at a 3.5% rate in current dollars in the 3rd quarter, which became a 2.1% real growth rate of consumed goods and services after an annualized PCE price index increase of 1.4% was used to adjust that spending for inflation....consumer outlays for durable goods rose at a 5.1% rate while prices of those durable goods fell at a 4.1% rate, and thus the BEA found real growth in output of consumer durables rose at a 9.5% rate, as consumption of automobiles grew at a 16.2% rate while real consumption of recreational goods and vehicles, furniture and other durable goods all increased as well...the BEA also found that real output of consumer non-durable goods fell at a 1.4% rate, after lower consumer spending for non-durables at a 0.6% rate was adjusted for prices that rose at a 0.8% rate, as real consumption of gasoline and other energy goods fell at a 3.5% rate, while consumption of all other non-durable goods other than food was also lower....meanwhile, the 4.7% nominal growth in consumer outlays for services was deflated by a 2.6% increase in prices for personal services to show real output of consumer services grew at a 2.1% annual rate, as the real growth rates for outlays for housing and utilities, for health care services and for food services and accommodations were all slightly more than 2.3%...as a result of these changes in growth from the 2nd to the 3rd quarter, the increase in outlays for durable goods added 0.69 percentage points to the GDP growth rate, while decreased consumption of non-durable goods subtracted 0.21 percentage points, and increased consumption of services added 0.99 percentage points to the growth rate of the economy in the 3rd quarter.

the change in other components of the change in GDP are computed by the BEA in the same manner as we have just showed for computing PCE; ie, the actual annualized increase in current dollar spending for the quarter is adjusted with an annualized inflation factor for that component, yielding the change in real units of goods or services produced in the quarter at an annual rate...thus, real gross private domestic investment, which had already shrunk at a 3.3% annual rate in the 1st quarter and at a 7.9% annual rate in the 2nd quarter, grew at a modest 3.1% annual rate from those levels in the 3rd quarter...real growth in fixed investments shrunk at a 0.6% annual rate in the 3rd quarter, after shrinking at a 1.1% rate in the 2nd quarter...among fixed investments, real non-residential fixed investment grew at a 1.2% rate, as real investment in non-residential structures grew at a 5.4% rate and added 0.14 percentage points to 3rd quarter GDP, and real investment in intellectual property grew at 4.0% rate and added 0.16 percentage points to GDP, while real investment in equipment fell at a 2.7% rate and subtracted 0.16 percentage points from GDP...meanwhile, real residential investment shrunk at a 6.2% rate in the 3rd quarter, after shrinking at a 7.7% rate in the 2nd quarter, and subtracted another 0.24 percentage points from 3rd quarter GDP...for an easy to read table as to what's included in each of those GDP investment categories, see the NIPA Handbook, Chapter 6, page 3...

meanwhile, real private inventories grew by an inflation adjusted $12.6 billion in the quarter, in contrast to the inflation adjusted inventory shrinkage at a $9.5 billion rate we saw in the 2nd quarter, and as a result the $22.1 billion positive change in real inventory growth added 0.61% to the 3rd quarter's growth rate, after $50.2 billion slower real inventory growth in the 2nd quarter had subtracted 1.16% from that quarter's GDP....however, since greater growth in inventories indicates that more of the goods produced during the quarter were left in storage or "sitting on the shelf”, their increase by $22.1 billion in turn means real final sales of GDP were actually smaller by that amount, and hence real final sales of GDP only rose at a 2.3% rate in the 3rd quarter, down from the real final sales growth rate of 2.6% in the 2nd quarter, when a $50.2 billion decrease in inventory growth meant growth in real final sales was that much larger than growth in GDP...

after adjustment for higher export and import prices, both real exports and real imports increased in the 3rd quarter, but real exports increased by much more...our real exports of goods and services rose at a 10.0% rate in the third quarter, up from the 1.8% 2nd quarter growth rate, as our exports of goods increased at a 14.5% rate, while our real imports rose at a 2.3% rate in the 3rd quarter after rising at a 0.2% rate in the 2nd 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 elsewhere in this GDP calculation), 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 3rd quarter increase in real exports added 1.17 percentage points to 3rd quarter GDP, while higher 3rd quarter imports subtracted 0.34 percentage points from 3rd quarter GDP, and thus our improving trade balance added a net of 0.83 percentage points to 3rd quarter GDP, after our improved trade deficit had added 0.18 percentage points in the second quarter..

finally, real consumption and investment by government increased at a 0.5% annual rate in the 3rd quarter, after shrinking at a 1.7% rate in the 2nd quarter, as federal government consumption and investment rose at a 2.5% rate, while state and local consumption and investment contracted at a 0.7% rate....inflation adjusted federal spending for defense grew at a 2.1% rate and added 0.08 percentage points to 3rd quarter GDP growth, while real non-defense federal consumption and investment rose at a 3.0% rate and added another 0.08 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 fell at a 0.7% annual rate and subtracted 0.08 percentage points from the growth of 3rd quarter GDP, as real growth in state and local consumption expenditures added 0.11 percentage points while real growth in state and local investment shrunk at a 10.1% rate and subtracted 0.18 percentage points...

we'll again include our FRED GDP graph, so you can get a picture of how these GDP components all come together...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 (ie, inflation adjusted) personal consumption expenditures are shown in blue, the changes in real gross private investment, including structures, equipment and intangibles, are shown in red, the quarterly change in private inventories is in yellow, the real change in imports are shown in green, the real change in exports are shown in purple, while the real change in state and local government spending and  investment is shown in pink, and the real change in Federal government spending and investment is shown in grey...those components of GDP that contracted in a given quarter are shown below the zero line and subtract from GDP, those that are above the line grew during that quarter and added to GDP; the exception to that is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so that when imports shrink, they will appear above the line as an addition to GDP, and when they increase, as they have in the recent quarter, they'll appear below the zero line...notice that over the 3 quarters prior to this one, our personal consumption expenditures in blue were just about the only contributor to growth, with inventories in yellow being a major negative in the 2nd quarter (2nd grouping from the right)...in the 3rd quarter, however, despite lower personal consumption expenditures, exports in violet and inventories in yellow picked up the slack, leading to the largest increase in GDP in 8 quarters...looking back 8 quarters, you can also easy spot the 3rd quarter of 2014, when GDP grew at a 5.0% rate, as it's the only grouping on the chart with no negatives, showing what the economy can do when it's firing on all cylinders...

3rd quarter 2016 advance GDP

September Durable Goods: New Orders Down 0.1%, Shipments Up 0.8%, Inventories Up 0.1%

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for September (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods fell by $0.3 billion or 0.1% to $227.3 billion in September, after August's new orders were revised from the $226.9 billion reported last month to $227.6 billion, now 0.3% greater than July's orders, which had originally been reported as unchanged...year to date new orders are now 0.4% below those of 2015, vs the 0.6% year over year change we saw in this report last month....the volatile monthly change in new orders for transportation equipment was responsible for the technical drop, as new transportation equipment orders fell $0.6 billion or 0.8 percent to $77.5 billion, on a 44.8% decrease to $2,898 million in new orders for defense aircraft....excluding orders for transportation equipment, new orders rose 0.2%, and excluding just new orders for defense equipment, new orders increased 0.7%......meanwhile , new orders for nondefense capital goods less aircraft, a proxy for equipment investment, fell $0.733 billion or 1.2 percent to $62.94 billion...

meanwhile, the seasonally adjusted value of September shipments of durable goods, which were included as inputs into various components of 3rd quarter GDP after adjusting for changes in prices, increased by $2.0 billion or 0.8 percent to $234.5 billion, after August shipments were revised from from $458.1 billion to $458.4 billion, which is now considered virtually unchanged from July....a $1.8 billion or 2.3 percent increase in shipments of transportation equipment was reason for most of the increase, as without them all other shipments rose 0.1%...at the same time, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the 3rd month in a row, after being down 6 months, increasing by $0.5 billion or 0.1 percent to $384.0 billion, after August inventories were revised from $622.0 billion to $621.6 billion, but remained statistically 0.1% higher than the prior month...an increase in inventories of machinery were a major factor in the September inventory increase, as they rose $0.3 billion or 0.5 percent to $66.0 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, were down for the 4th consecutive month, falling by $3.9 billion or 0.4 percent to $1,119.3 billion, following a August decrease of 0.1%, which was statistically unrevised...a $4.6 billion or 0.6 percent to $764.2 billion decrease in unfilled orders for transportation equipment was responsible for all of the decrease and then some, as unfilled orders excluding transportation equipment orders rose 0.2% to $355,072 million....compared to a year earlier, the unfilled order book for durable goods is now 1.7% below the level of last September, with unfilled orders for transportation equipment 2.7% below their year ago level, largely on a 6.6% decrease in the backlog of orders for motor vehicles...  

New Home Sales Remain Well Ahead of Last Year’s Pace

the Census report on New Residential Sales for September (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 593,000 annually, which was 3.1 percent (±16.2%)* above the revised August rate of 575,000 new single family home sales a year and 29.8 percent (±23.4%) above the estimated annual rate that new homes were selling at in September of last year....the asterisk indicates that based on their small sampling, Census could not be certain whether September new home sales rose or fell from those of August, 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 August were revised from the annual rate of 609,000 reported last month to a 575,000 a year rate, while home sales in July, initially reported at an annual rate of 654,000 and revised to a 659,000 a year rate last month, were revised to a 629,000 a year rate with this report, and while June's annualized home sale rate, initially reported at an annual rate of 592,000 and revised from a 582,000 a year rate to a 579,000 a year rate last month, were further revised down to a 558,000 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 46,000 new single family homes sold in September, down from the estimated 47,000 new homes that sold in August and the 55,000 that sold in July.....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in September was $313,500, up from the median sale price of $293,800 in August and up from the median sales price of $307,600 in September a year ago, while the average September new home sales price was $377,700, up from the $356,200 average sales price in August, and up from the average sales price of $367,800 in September a year ago....a seasonally adjusted estimate of 235,000 new single family houses remained for sale at the end of September, which represents a 4.8 month supply at the September sales rate, up from the reported 4.6 months of supply in August...for graphs and additional commentary on this report, see the following two posts by Bill McBride at Calculated Risk: New Home Sales at 593,000 Annual Rate in September and A few Comments on September 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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