Sunday, July 2, 2017

1st Quarter GDP revision, Reports on May's Personal Income and Outlays and Durable Goods

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....other widely watched releases included the May advance report on durable goods and the Case-Shiller house price indexes for April from S&P Case-Shiller, who saw their national home price index rise 5.5% from the same month's report a year ago...this week also saw the release of the Chicago Fed National Activity Index (CFNAI) for May, a weighted composite index of 85 different economic metrics, which fell from a upwardly revised +0.57 in April to -0.26 in May...that left the 3 month average of the index at +0.04, indicating national economic activity has been pretty close to the historical trend over these recent months...in addition, this week also saw the results of the last two Fed manufacturing surveys for June;  the Texas area manufacturing survey from the Dallas Fed reported its broadest general business activity index slipped from +17.2 in May to +15.0 in June, indicating that Texas manufacturing activity continued to expand, but at a slightly slower pace, while 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 from +1 in May to +7 in June, indicating a modest pickup in that region's manufacturing...

1st Quarter GDP Revised to Show Growth at a 1.4% 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 1.4% annual rate in the quarter, revised from the 1.2% growth rate reported in the second estimate last month, as personal consumption of services was revised higher and the GDP deflator was revised lower....in current dollars, our first quarter GDP grew at a 3.4% annual rate, same as was reported in the 2nd estimate, increasing from what would extrapolate to $18,869.4 billion annually in the 4th quarter to an annualized $19,027.1 billion in the 1st quarter, with the headline 1.4% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging more than 1.9%, revised from 2.2%, was applied to the current dollar change...

recall 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 third estimate of 1st quarter GDP, which we find linked to on the sidebar of the BEA press release...specifically, we cite the data from table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 2nd quarter of 2013; from table 2, which shows the contribution of each of the components to the GDP figures for those months and years; from table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; from table 4, which shows the change in the price indexes for each of the components; and from 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 full pdf for the 1st quarter second estimate, which this estimate revises, is here...

real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 1.1% annual rate in the 1st quarter, up from the 0.6% growth rate reported last month, as a 3.5% increase in the rate of personal spending in the quarter was deflated with an annualized 2.4% increase in the PCE price index, an inflation adjustment which was essentially unrevised from the second estimate....real consumption of durable goods fell at a 1.6% annual rate, which was revised from the 1.4% decrease shown in the second estimate, and subtracted 0.11 percentage points from GDP, as a drop in consumption of automobiles & parts at a 14.4% rate more than offset an increase in real consumption of recreational goods and vehicles and other durable goods...real consumption of nondurable goods by individuals rose at a 1.6% annual rate, revised from the 1.2% increase reported in the 2nd estimate, and added 0.23 percentage points to 1st quarter growth, as relatively large increases in real consumption of food and other non-durables more than offset small decreases in real consumption of clothing and energy goods ....meanwhile real consumption of services rose at a 1.4% annual rate, revised from the 0.8% rate reported last month, and added 0.64 percentage points to the final GDP tally, as the growth in consumption of both health care and financial services were revised to more than double that shown in the 2nd estimate....

on the other hand, seasonally adjusted real gross private domestic investment grew at a 3.7% annual rate in the 1st quarter, revised from the 4.8% growth estimate reported last month, as real private fixed investment grew at a 11.0% rate, rather than at the 11.9% rate reported in the second estimate, while the contraction in inventory growth was somewhat larger than previously estimated...real investment in non-residential structures was revised from growth at a 28.4% rate to growth at a 22.6% rate, while real investment in equipment was revised to show growth at a 7.8% rate, up from the 7.2% growth rate previously reported...at the same time, the quarter's investment in intellectual property products was revised from growth at a 6.7% rate to growth at a 6.4% rate, and the growth rate of residential investment was also revised lower, from 13.8% to 13.0% annually…after those revisions, the increase in investment in non-residential structures added 0.56 percentage points to the 1st quarter's growth rate, the increase in investment in equipment added 0.42 percentage points to the quarter's growth, greater investment in intellectual property added 0.26 percentage points, while growth in residential investment added 0.48 percentage points to the increase in 1st quarter GDP...

meanwhile, the growth in real private inventories was revised from the $4.3 billion in inflation adjusted dollars reported last month to show inventory grew at an inflation adjusted $2.6 billion rate in the 1st quarter...this came after inventories had grown at an inflation adjusted $49.6 billion rate in the 4th quarter, and hence the $47.0 billion smaller real inventory growth than in the 4th quarter subtracted 1.11 percentage points from the 1st quarter's growth rate, revised from the 1.07 percentage point subtraction due to slower inventory growth shown in the second estimate....however, since slower growth in inventories ultimately indicates that less of the goods produced during the quarter were left "sitting on the shelf”, that decrease by $47.0 billion meant that real final sales of GDP were actually greater than GDP by that much, and therefore the BEA finds that real final sales of GDP rose at a 2.6% rate in the 1st quarter, revised from 2.2% rate shown in the second estimate...

the previously reported increases in both real exports and in real imports were both revised higher, but exports saw the larger increase, and as a result our net trade was a slightly larger addition to GDP rather than was previously reported...our real exports grew at a 7.0% rate, revised from the 5.8% rate 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 0.82 percentage points to the 1st quarter's growth rate....meanwhile, the previously reported 3.8% increase in our real imports was revised to a 4.0% increase, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, that increase subtracted 0.59 percentage points from 1st quarter GDP....thus, our improving trade balance added a net 0.23% percentage points to 1st quarter GDP, rather than the 0.13% percentage point addition resulting from our improving foreign trade balance that was indicated by the second estimate..

finally, there were also small revisions to real government consumption and investment in this 3rd estimate, as the entire government sector shrunk at a 0.9% rate, revised from the 1.1% shrinkage of government indicated by the 2nd estimate....real federal government consumption and investment was seen to have shrunk at a 2.0% rate from the 4th quarter in this estimate, which was unrevised from the 2nd estimate...real federal outlays for defense showed shrinkage at a 3.9% rate, same as the rate previously reported, still subtracting 0.16% percentage points from 1st quarter GDP, while all other federal consumption and investment grew at a 0.9% rate and added 0.02 percentage points to 1st quarter 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 contracted at a 0.2% rate in the quarter, which was revised from the 0.6% shrinkage shown in the 2nd estimate, and subtracted 0.02 percentage points from 1st quarter GDP, as real growth in state and local consumption expenditures added 0.05 percentage points, while real state and local investment shrunk at a 3.7% rate and subtracted 0.07 percentage points from the quarter's growth...

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 shown 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...then, 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 the weak growth in the first quarter was due to the smallest increase in real personal consumption expenditures since the 2nd quarter of 2013, but it's also worth noting that fixed private investment in red was a greater contributor to GDP than PCE, with its greatest growth since the first quarter of 2012…  

3rd estimate 1st quarter 2017 GDP

May Personal Income up 0.4%, Spending up 0.1%; 2 Months PCE Would Add 1.84 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 69% 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....

thus, when the opening line of the press release for this report tell us "Personal income increased $67.1 billion (0.4 percent) in May", they mean that the annualized figure for seasonally adjusted personal income in May, $16,487.9 billion, was $67.1 billion, or a bit more than 0.4% greater than the annualized  personal income figure of $16,420.8 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, rose by nearly 0.5%, from an annual rate of an annual rate of $14,418.4 billion in April to an annual rate of $14,490.1 billion in May....the contributors to the increase in personal income and disposable personal income can be viewed in table 1 of the Full Release & Tables (pdf) for this release, also as annualized amounts, and were led by a $39.8 billion increase to $2,345.6 billion annually in interest and dividend income, while wages and salaries rose by just $6.6 billion annually to $8,383.9 billion in May…

for the personal consumption expenditures (PCE) that we're most interested in, BEA reports that they increased at a $7.3 billion annual rate, or by less than 0.1 percent, as the annual rate of PCE rose from $13,206.7 billion in April to $13,214.0 in May; that happened as the April PCE figure was revised up from the originally reported $13,108.4 billion annually and March PCE was revised up from $13,008.9 billion to $13,157.5 billion, a change that was already captured by the 3rd estimate of 1st quarter GDP we reported on earlier....the current dollar increase in May spending resulted from a $27.1 billion increase to $8,988.5 billion in annualized spending for services, which was offset by $19.8 billion annualized decrease to an annualized $4,225.5 billion annualized in spending for goods....total personal outlays for May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $9.8 billion to $13,699.1 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $791.0 billion annual rate in May, up from the revised $728.8 billion annualized personal savings in April... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.5% in May from April's savings rate of 5.1%...

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 achieves 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 fell from 112.198 in April to 112.127 in May, a month over month deflation rate that's statistically -0.0633%, which BEA reports as an decrease of 0.1 percent, following the PCE price index increase of 0.2% they reported for April...applying that inflation adjustment to the nominal amounts of spending left reported real PCE up 0.1% in May, after an April real PCE increase of 0.2% ...notice that when those PCE 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 11,785.0 billion annually, 0.1189% more than April's 11,771.0 billion, a difference that the BEA reports as 0.1%, even as full fractions are used in all the computations...

however, to estimate the impact of the change in PCE on the change in GDP, such 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 11,701.3 billion in chained 2009 dollars..(note 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, 11,771.0 billion and 11,785.0  billion respectively, we can 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 11,778.0 to the 1st quarter real PCE of 11,701.3, we find that 2nd quarter real PCE has grown at a 2.65% annual rate for the two months of the 2nd quarter we have data for...(note the math to get that annual rate: (((11,785.0  + 11,771.0)/ 2)/11,701.3) ^ 4 = 1.02648....that's a pace that would add 1.84 percentage points to the growth rate of the 2nd quarter by itself, even if there is no improvement in June PCE from that average... 

May Durable Goods: New Orders Down 1.1%, Shipments Up 0.8%, Inventories Up 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 $2.5 billion or 1.1 percent to $228.2 billion in May, following a revised decrease of 0.9% in April’s new orders, which had originally been reported as a 0.7% decrease...however, year to date new orders are still 2.8% higher than they were a year ago.....as is usually the case, the volatile monthly change in new orders for transportation equipment drove the May headline change, as those transportation equipment orders fell $2.7 billion or 3.4 percent to $75.4 billion, partly on a 30.8% decrease to $3,719 million in new orders for defense aircraft....excluding new orders for transportation equipment, other new orders were up 0.1% in May, but the important new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, were still down 0.2% at $62,885 million...

the seasonally adjusted value of May's shipments of durable goods, which represent inputs into various components of 2nd quarter GDP before adjusting for changes in prices, increased by $1.8 billion or 0.8 percent to $234.9 billion, after April shipments decreased by 0.3%...again, shipments of transportation equipment drove the change, as they rose $1.5 billion or 1.9 percent to $78.8 billion, as the value of shipments of motor vehicles rose 1.3% to $54,257 million...excluding that volatile sector, the value of other shipments of durable goods rose 0.2%, and are now 2.5% higher year to date than a year ago.... meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the 10th time in 11 months, increasing by $0.7 billion or 0.2 percent to $395.4 billion, after April inventories were revised from $649.7 billion to $650.0 billion, a 0.2% increase from March...inventories of motor vehicles led the increase, rising $274 million or 0.8 percent to $34,476 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 three months, decreasing by $2.3 billion or 0.2 percent to $1,120.1 billion, following a April increase of 0.2% to $1,122.4 billion, revised from $1,123.0 billion...a $3.4 billion or 0.4% decrease to $762.8 billion in unfilled orders for transportation equipment was responsible for the decrease, as unfilled orders excluding transportation equipment were up 0.3% to $357,317 million....compared to a year earlier, the unfilled order book for durable goods is still 1.4% below the level of last May, with unfilled orders for transportation equipment 3.5% below their year ago level, on a 4.7% decrease in the backlog of orders for commercial aircraft...

 

(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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