Sunday, April 2, 2017

4th Quarter GDP Revision, February’s Income and Outlays

the key economic releases this week were the 3rd estimate of 4th quarter GDP and the February report on Personal Income and Spending from the Bureau of Economic Analysis...in addition, the Case-Shiller Home Price Index for January from S&P Case-Shiller reported that home prices during November, December and January averaged 6.0% higher nationally than prices for the same homes that sold during the same 3 month period a year earlier...this week also saw the release of the last two regional Fed manufacturing surveys for March: the Dallas Fed Texas Manufacturing Outlook Survey reported their general business activity composite index fell to +16.9 from last month's 11 year high of +24.5, still suggesting ongoing expansion in the Texas oil patch economy, while 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 + 22 in March, it's highest reading since April 2010, up from +17 in February from +12 in January, suggesting an accelerating expansion in that region's manufacturing...

4th Quarter GDP Revised to Show Growth at a 2.1% Rate

the Third Estimate of our 4th Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 2.1% rate in the 4th quarter, revised from the 1.9% growth rate indicated by the second estimate reported last month, as personal consumption expenditures and inventory investment were greater than was previously estimated, while losses from trade were worse than was previously estimated.....in current dollars, our fourth quarter GDP grew at a 4.2% annual rate, increasing from what would work out to be a $18,675.3 billion a year output rate in the 3rd quarter to a $18,869.4 billion annual rate in the 4th quarter, with the headline 2.1% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 2.1%, also known as the GDP deflator, was applied to the current dollar change...

remember that this release 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 the prefix "real" is used to indicate that each change has been adjusted for inflation using price changes chained from 2009, and then that all percentage changes in this report are calculated from those 2009 dollar figures, which would be better thought of as a quantity indexes than as any reality based dollar amounts....for our purposes, all the data that we'll use in reporting the changes here comes directly from the pdf for the 3rd 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 2nd estimate for the 4th quarter, which this estimate revises, is here...

real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 3.5% annual rate in the 4th quarter, rather than the 3.0% growth rate reported last month, as a 5.5% increase in the growth rate of personal spending was deflated with an annualized 2.0% increase in the PCE price index, an inflation adjustment which was revised from the 1.9% PCE price index reported in the second estimate....real consumption of durable goods grew at a 11.4% annual rate, revised from 11.5% in the second estimate, and added 0.82 percentage points to GDP, as real output of motor vehicles rose at a 16.2% annual rate and accounted for 0.39 of that growth....real consumption of nondurable goods by individuals rose at a 3.3% annual rate, revised from the 2.8% increase reported in the 2nd estimate, and added 0.47 percentage points to 4th quarter growth, as lower real consumption of energy goods was the only drag on the quarter’s non-durables growth....meanwhile real consumption of services rose at a 2.4% annual rate, revised from the 1.8% rate reported last month, and added 1.11 percentage points to the final GDP tally, as an increase in the real output of health care services at a 5.6% rate accounted for more than half of the 4th quarter increase in services...

seasonally adjusted real gross private domestic investment grew at a 9.4% annual rate in the 4th quarter, revised from the 9.2% growth estimate made last month, as real private fixed investment was revised from growth at a 3.2% rate to growth at a 2.9% rate, while real inventory growth was greater than previously estimated...investment in non-residential structures was revised from shrinking at rate of 4.5% to shrinking at a 1.9% rate, while real investment in equipment grew at a 1.9% rate, unrevised from the 2nd estimate....meanwhile, the 4th quarter's investment in intellectual property products was revised from growth at a 4.5% rate to growth at a 1.3% rate, while the growth rate of residential investment was also statistically unrevised at 9.6% annually…after revisions, the decrease in investment in non-residential structures subtracted 0.05 percentage points from the economy's growth rate, investment in equipment added 0.11 percentage points, investment in intellectual property added 0.05 percentage points , and growth in residential investment added 0.35 percentage points to the change in 4th quarter GDP...

meanwhile, the growth in real private inventories was revised from the previously reported $46.2 billion in inflation adjusted growth to show inventory growth at an inflation adjusted $49.6 billion rate, which came after inventories had grown at an inflation adjusted $7.1 billion rate in the 3rd quarter, and hence the $42.5 billion positive change in real inventory growth from the 3rd quarter added 1.01 percentage points to the 4th quarter's growth rate, revised from the 0.94 percentage point addition to inventory growth reported in the second estimate....since growth in inventories indicates that more of the goods produced during the quarter were left in a warehouse or sitting on the shelf, their increase by $42.5 billion meant that real final sales of GDP were actually smaller than GDP by that much, and hence real final sales of GDP grew at a 1.1% rate in the 4th quarter, compared to the real final sales increase at a 3.0% rate in the 3rd quarter, when the change in inventories was smaller....

the previously reported decrease in real exports was revised lower with this estimate, while the reported increase in real imports was revised higher, and as a result our net trade was a greater subtraction from GDP than was previously reported...our real exports fell at a 4.5% rate, rather than at the 4.0% 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 0.55 percentage points from the 4th quarter's growth rate....meanwhile, the previously reported 8.5% increase in our real imports was revised to an 9.0% increase, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their growth subtracted 1.27 percentage points from 4th quarter GDP....thus, our weakening trade balance subtracted a net 1.82 percentage points from 4th quarter GDP, revised from the 1.70 percentage point GDP subtraction resulting from foreign trade that was indicated in the second estimate..

finally, there was also a downward revision to real government consumption and investment in this 3rd estimate, as the real growth rate for the entire government sector went from a 0.4% rate to a 0.2% rate...real federal government consumption and investment was statistically unchanged, however, as real federal spending for defense shrunk at a 3.6% rate and subtracted 0.14 percentage points from 4th quarter GDP, while all other federal consumption and investment grew at a 2.3% rate and added 0.06 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...meanwhile, real state and local consumption and investment was revised from growth at a 1.3% rate in the 2nd estimate to growth at a 1.0% rate in this estimate, as state and local investment spending grew at a 3.3 rate and added 0.11 percentage points to 4th quarter GDP, while state and local consumption spending was little changed and had no statistical impact on GDP... 

our FRED bar graph for GDP below has been updated to reflect 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 clear that the drop in exports and the surge in imports were the major negatives in the 4th quarter, and that with the increases in personal consumption expenditures, investment and inventories, the 4th quarter could have topped the third had our trade deficit merely remained flat.. 

3rd estimate 4th quarter 2016 GDP

Personal Income up 0.4% in February, Personal Spending up 0.1%, PCE Price Index up 0.1%

as you can see from the GDP chart above, our personal consumption expenditures (PCE) in blue are usually the major metric for determining the ultimate trajectory of GDP each quarter, and hence the key monthly release that inputs into GDP each quarter is 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 monthly 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 metrics are not the current monthly change; rather, they're seasonally adjusted and at an annual rate, ie, in February's case, this report tells us what income and spending would be for a year if February's adjusted income and spending were extrapolated over an entire year...however, the percentage changes are computed monthly, and in the case of this month's report they give us the percentage change in each annual metric from January to February...

thus, when the opening line of the press release for this report tell us "Personal income increased $57.7 billion (0.4 percent) in February", that means that the annualized figure for personal income in February, $16,438.5 billion, was $57.7 billion, or a bit less than 0.4% greater than the annualized  personal income figure of $16,380.8 billion for January; the actual change in personal income from January to February is not given...similarly, annualized disposable personal income, which is income after taxes, rose by a bit more than 0.3%, from an annual rate of an annual rate of $14,357.6 billion in January to an annual rate of $14,402.2 billion in February...the monthly contributors to the increase in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also annualized...in February, the largest contributors to the $57.7 billion annual rate of increase in personal income were a $40.7 billion increase in wages and salaries and a $6.0 billion increase in rental income…

for the personal consumption expenditures (PCE) that will be included in 1st quarter GDP, BEA reports that they increased at a $7.4 billion rate, or by less than 0.1 percent, as the annual rate of PCE rose from $13,098.6 billion in January to $13,106.0 in February, after the January PCE figure was revised up from the originally reported $13,065.8 billion annually...the current dollar increase in February spending resulted from a $9.4  billion annualized increase to $8,874.9 billion in annualized in spending for services, which was partially offset by a $1.3 billion decrease to $4,231.1 billion in spending for goods....total personal outlays for February, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $7.5 billion to $13,594.2 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $808.0 billion annual rate in February, up from the revised $770.9 billion in annualized personal savings in January... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.6% in February from January's savings rate of 5.4%...  

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 with the price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, also included in this report....looking at Table 9 in the pdf, we see that that index rose from 112.102 in January to 112.248 in February, a month over month inflation rate that's statistically 0.1302%, which BEA reports as an increase of 0.1 percent, following the PCE price index increase of around 0.4% in January...applying that inflation adjustment to the nominal amount of spending left real PCE statistically 0.1% lower in February, after January's real PCE increase was revised to down 0.2% from the previously reported 0.3% decrease...note 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 February's chained dollar consumption total works out to 11,676.1 billion annually, nearly 0.1% less than January's 11,684.8 billion... 

finally, to estimate the impact of the change in PCE on the change in GDP, we have to compare real PCE from January and February to the the real PCE of the 3 months of the fourth quarter....while this report shows PCE for all those months on a monthly basis, the BEA also provides the annualized chained dollar PCE on a quarterly basis in table 8 in the pdf for this report, where we find that the annualized real PCE for the 4th quarter was represented by 11,669.8 billion in chained 2009 dollars..(that's the same figure shown in table 3 of the pdf for the 4th quarter GDP report)...by averaging the annualized chained 2009 dollar figures for January and February, 11,684.8 billion and 11,676.1 billion, we get an equivalent annualized PCE for the two months of the 1st quarter that we have data for so far....when we compare that average of 11,680.45 to the 4th quarter real PCE of 11,669.8, we find that 1st quarter real PCE has grown at a 0.365% annual rate for the two months we do have (note the math to get that annual rate: (((11 684.8 + 11 676.1) / 2) / 11 669.8)^4 = 1.00365545...that means that if March real PCE does not improve from the average of January and February, growth in PCE would add just 0.25 percentage points to the growth rate of the 1st quarter, which would be the weakest contribution from PCE since the fourth quarter of 2009...  

 

(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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