Sunday, December 3, 2017

3rd quarter GDP revision, October income and outlays, construction spending, and new home sales

major economic reports released over the past week included the 2nd estimate of 3rd quarter GDP and the October report on Personal Income and Spending, both from the Bureau of Economic Analysis, and the October report on Construction Spending (pdf) and the October report on new home sales, both from the Census bureau...in addition, the week brought us the last two regional Fed manufacturing surveys for November; the Richmond Fed Survey of Manufacturing Activity for November, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported its broadest composite index jumped to a record high of +30 in November, up from +12 in October, suggesting a robust expansion of that region's manufacturing, while the Dallas Fed Texas Manufacturing Outlook Survey reported its general business activity index fell to +19.4 in November from +27.6 in October, still indicative of a strong expansion of the Texas economy...

the week’s privately issued reports included the Case-Shiller Home Price Index for September from S&P Case-Shiller, an index generated by averaging relative home sales prices from July, August and September of this year against a January 2000 baseline, and which reported that home prices nationally for those 3 months averaged 6.2% higher than prices for the same homes that sold during the same 3 month period a year earlier, up from the 6.1% year over year increase shown in the prior report; the light vehicle sales report for November from Wards Automotive, which estimated that vehicles sold at a 17.35 million annual rate in November, down 3.0% from the 17.89 million annual rate in October, and down 3.3% from the 17.95 million annual rate in November a year ago, and the widely followed November Manufacturing Report On Business from the Institute for Supply Management (ISM), which indicated that the manufacturing PMI (Purchasing Managers Index) fell to 58.2% in November, down slightly from 58.7% in October, still suggesting an ongoing expansion in manufacturing firms nationally...

3rd Quarter GDP Revised to Show Growth at a 3.3% Rate

the Second Estimate of our 3rd Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 3.3% rate in the quarter, revised up from the 3.0% growth rate reported in the advance estimate last month, as growth in both fixed investment and investment in inventories were revised higher, the decrease in our imports was greater than previously estimated, and state and local government spending were revised up from the prior estimate....in current dollars, our third quarter GDP grew at a 5.5% annual rate, increasing from what would work out to be a $19,250.0 billion a year rate in the 2nd quarter to a $19,509.0 billion annual rate in the 3rd quarter of this year, with the headline 3.3% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 2.1%, aka the GDP deflator, was applied to the current dollar change...

as we review this month's revisions, recall that the press release for the 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 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 2nd estimate of 3rd 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 4th quarter of 2013; 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 in the most recent quarters; table 4, which shows the change in the price indexes for each of those 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...the pdf for the 3rd quarter advance estimate, which this estimate revises, is here...

growth of real personal consumption expenditures (PCE), the largest component of GDP, was revised from the 2.4% growth rate reported last month to a 2.3% rate in this 2nd estimate…that growth rate figure was arrived at by deflating the 3.9% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated inflation grew at a 1.5% annual rate in the 3rd quarter, which was statistically unrevised from the PCE inflation rate reported a month ago...real consumption of durable goods grew at a 8.1% annual rate, which was revised from the 8.3% growth rate shown in the advance report, and added 0.59 percentage points to GDP, as an increase in real consumption of motor vehicles and parts at a 12.6% rate accounted for almost half the durables goods increase...real consumption of nondurable goods by individuals grew at a 2.0% annual rate, revised from the 2.1% growth rate reported in the 1st estimate, and added  0.30 percentage points to 3rd quarter economic growth, as lower consumption of clothing and energy goods was more than offset by greater consumption of food and other non-durables ….at the same time, consumption of services rose at a 1.5% annual rate, statistically unrevised from the growth rate reported last month, and added 0.70 percentage points to the final GDP tally, as real consumption of health care rose at a 4.2% rate and accounted for 60% of the quarter’s growth in services...

meanwhile, seasonally adjusted real gross private domestic investment grew at a 7.3% annual rate in the 3rd quarter, revised from the 6.0% growth estimate reported last month, as real private fixed investment grew at a 2.4% rate, revised from the 1.5% rate reported in the advance estimate, while inventory growth was greater than previously estimated...investment in non-residential structures was revised to show contraction at a 6.8% rate, worse than the 5.2% contraction rate previously reported, while real investment in equipment was revised from growth at a rate of 8.6% to growth at a 10.5% rate, and the quarter's investment in intellectual property products was revised from growth at a 4.3% rate to growth at a 5.8% rate...on the other hand, real residential investment was shown to be shrinking at a 5.1% annual rate, rather than the 6.0% contraction rate previously reported…after those revisions, the decrease in investment in non-residential structures subtracted 0.20 percentage points from the 3rd quarter's growth rate, the increase in investment in equipment added 0.56 percentage points to the quarter's growth rate, lower residential investment subtracted 0.20 percentage points from GDP, while growth in investment in intellectual property added 0.23 percentage points to the growth rate of 3rd quarter GDP...

in addition, investment in real private inventories grew by an inflation adjusted $39.0 billion in the 3rd quarter, revised from the originally reported $35.8 billion of inventory growth...this came after inventories had grown at an inflation adjusted $5.5 billion rate in the 2nd quarter, and hence the $33.5 billion increase in real inventory growth added 0.80 percentage points to the quarter's growth rate, revised from the 0.73 percentage point addition from inventory growth that was indicated in the advance estimate....since growth in inventories indicates that more of the goods produced during the quarter were left in warehouses or "sitting on the shelf”, their increase by $33.5 billion meant that real final sales of GDP were relatively smaller by that much, and hence real final sales of GDP increased at a 2.5% rate in the 3rd quarter, down from the real final sales growth rate of 2.9% in the 2nd quarter, when the smaller increase in inventory growth meant that growth in real final sales was fairly close to real growth in GDP...

the previously reported increase in real exports was revised a bit lower with this estimate, while the previously reported decrease in real imports was revised even lower, 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 2.2% rate rather than the 2.3% 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 growth added 0.27 percentage points to the 3rd quarter's growth rate, down a tad from the 0.28 percentage point addition shown in the previous report....meanwhile, the previously reported 0.8% decrease in our real imports was revised to a 1.1% decrease, and since imports are subtracted from GDP because they represent either consumption or investment that was not produced here, their decrease conversely added 0.17  percentage points to 3rd quarter GDP, rather than the 0.12 percentage point addition shown last month....thus, our improving trade balance added a rounded total of 0.43 percentage points to 3rd quarter GDP, rather than the (rounded) 0.41 percentage point addition that had been indicated by the advance estimate…

finally, the entire government sector grew at a 0.4% rate, revised from a contraction at a 0.1% rate previously reported, as federal government consumption and investment grew more than initially estimated, while real state & local government consumption and investment shrunk less...real federal government consumption and investment was seen to have grown at a 1.3% rate from the 2nd quarter in this estimate, revised from the 1.1% growth rate shown in the advance estimate, as real federal outlays for defense grew at a 2.4% rate and added 0.09 percentage points to 3rd quarter GDP, revised from the 2.3% growth rate shown previously, while all other federal consumption and investment shrunk at a 0.3% rate and subtracted 0.01 percentage point from 3rd quarter GDP....meanwhile, real state and local consumption and investment shrunk at a 0.1% rate in the quarter, which was revised from the 0.9% contraction rate reported in the 1st estimate, and subtracted 0.01 more percentage point from 3rd 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, indicating an increase in the output of those goods or services...

Personal Income up 0.4% in October, Personal Spending up 0.3%, PCE Price Index up 0.1%

the October report on Personal Income and Outlays from the Bureau of Economic Analysis includes the month's data for our personal consumption expenditures (PCE), which accounts for roughly 69.5% of the month's GDP, and with it 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...in addition, this release reports our 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 dollar value change reported for each of those metrics is 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 October'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 September to October....

thus, when the opening line of the press release for this report tell us "Personal income increased $65.1 billion (0.4 percent) in October", they mean that the annualized figure for seasonally adjusted personal income in October, $16,574.6 billion, was $65.1 billion, or a bit less than 0.4% greater than the annualized personal income figure of $16,509.5 billion extrapolated for September; the actual, unadjusted change in personal income from September to October is not given...at the same time, annualized disposable personal income, which is income after taxes, rose by less than 0.5%, from an annual rate of $14,447.2 billion in September to an annual rate of $14,513.3 billion in October...the monthly contributors to the increase in personal income, which can be viewed in detail in the Full Release & Tables (PDF) for this release, are also annualized...in October, the largest contributors to the $65.1 billion annual rate of increase in personal income were a $26.0 billion increase in wages and salaries and a $19.2 billion increase in dividend and interest income…

for the personal consumption expenditures (PCE) that we're most interested in, BEA reports that they increased at a $34.4 billion rate, or by less than 0.3%, as the annual rate of PCE rose from $13,523.0 billion in September to $13,557.4 in October....September PCE was revised from $13,531.2 billion annually to $13,523.0 billion, a revision that was already included in the 2nd estimate of 3rd quarter GDP which we just reviewed (this report, although usually released a business day later than the GDP release, is computed concurrently)....the current dollar increase in October spending resulted from a $5.0 billion annualized increase to an annualized $4,355.7 billion in spending for goods, and a $29.4 billion increase to an annualized $9,201.7 billion in spending for services...total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $38.7 billion to $14,056.0 billion annually in October, which left total personal savings, which is disposable personal income less total outlays, at a $457.3 billion annual rate in October, up from the revised $429.9 billion in annualized personal savings in September... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 3.2% in October from the September savings rate of 3.0%, which was a post recession low...

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....that's done with the price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, which is included in Table 9 in the pdf for this report...that index was at 113.245 in October, up from 113.082 in September, giving us a PCE price index change and an inflation adjustment of 0.0144% in October, which the BEA rounded to +0.1% for the press release...note that when the 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 that of another....that result is shown in table 7 of the PDF, where we see that October's chained dollar consumption total works out to 11,972.4 billion annually, 0.1095% more than September's 11,959.3 billion, a difference that the BEA reports as +0.1%...

however, to estimate the impact of the change in October PCE on the change in GDP, the month over month change in PCE doesn't help us much, since GDP is reported quarterly...thus we have to compare October's real PCE to the the real PCE of the 3 months of the third quarter....while this report shows PCE for all those amounts monthly, the BEA also provides the quarterly annualized chained dollar PCE for those three months in table 8 of the pdf for this report, where we find that the annualized real PCE for the 3rd quarter was represented by 11,921.1 billion in chained 2009 dollars..(ie, that's the same as what's shown in table 3 of the pdf for the 3rd quarter GDP report)....when we compare October's real PCE representation of 11,972.4 to the 3rd quarter real PCE figure of 11,921.1, we find that October real PCE has grown at a 1.73% annual rate compared to the 3rd quarter....that would mean that even if October real PCE does not improve during November and December, growth in PCE would still add 1.20 percentage points to the growth rate of the 4th quarter...

Construction Spending Rose 1.4% in October after Prior Months Were Revised Higher

the Census Bureau's report on construction spending for October (pdf) estimated that the month's seasonally adjusted construction spending would work out to $1,241.5 billion annually if extrapolated over an entire year, which was 1.4 percent (±1.5 percent)* above the revised annualized September estimate of $1,224.6 billion and also 2.9 percent (±1.6 percent) above the estimated annualized level of construction spending in October of last year...the annualized September construction spending estimate was revised 0.4% higher, from $1,219.5 billion to $1,224.6 billion, while the annual rate of construction spending for August was also revised 0.4% higher, from $1,216.0 billion to $1,220.8 billion...the combined upward revisions of $9.9 billion to annualized August and September construction spending figures would be averaged over the 3 months of the quarter and increase 3rd quarter construction by around $3.3 billion annually, and would thus imply a further upward revision of about 0.09 percentage points to third quarter GDP when the third estimate is released on December 22nd....

quoting details on types of construction spending from the Census release: Spending on private construction was at a seasonally adjusted annual rate of $949.9 billion, 0.6 percent (±0.8 percent)* above the revised September estimate of $943.8 billion. Residential construction was at a seasonally adjusted annual rate of $517.7 billion in October, 0.4 percent (±1.3 percent)* above the revised September estimate of $515.4 billion. Nonresidential construction was at a seasonally adjusted annual rate of $432.2 billion in October, 0.9 percent (±0.8 percent) above the revised September estimate of $428.4 billion.   In October, the estimated seasonally adjusted annual rate of public construction spending was $291.6 billion, 3.9 percent (±2.6 percent) above the revised September estimate of $280.7 billion. Educational construction was at a seasonally adjusted annual rate of $79.0 billion, 10.9 percent (±2.5 percent) above the revised September estimate of $71.2 billion. Highway construction was at a seasonally adjusted annual rate of $86.8 billion, 1.1 percent (±6.3 percent)* above the revised September estimate of $85.9 billion.

as you can see, construction spending inputs into 3 subcomponents of GDP; investment in private non-residential structures, investment in residential structures, and into government investment outlays, for both state and local and Federal governments...however, getting an accurate read on the impact of October spending reported in this release on 4th quarter GDP is difficult because all figures given here are in nominal dollars and as you know, data used to compute the change in GDP must be adjusted for changes in price... there are multiple prices indexes for different types of construction listed in the National Income and Product Accounts Handbook, Chapter 6 (pdf), so in lieu of trying to adjust for all of those types of construction separately, we've opted to use the producer price index for final demand construction as an inexact shortcut to make the needed price adjustment... that index showed that aggregate construction costs were up 0.5% month over month in October, after being up 0.3% in August and rising 0.1% in September... 

on that basis, we can estimate that October construction costs were roughly 0.9% more than those of July, 0.6% more than those of August, and obviously 0.5% more than September...we then use those percentages to inflate higher priced spending figures for each of those months, which is arithmetically the same as deflating October construction spending, for purposes of comparison...annualized construction spending in millions of dollars for the third quarter months is given as 1,224,551 in September, 1,220,897 in August, and 1,160,407 in July...thus to adjust October's nominal construction spending of $1,241,538 million for inflation compared to that of the third quarter, our formula becomes: 1,241,538  / (((1,224,551 * 1.005) + ( 1,220,897 *1.006) + (1,215,351 * 1.009)) / 3) = 1.010699, meaning real construction spending in October was up 1.07% vis a vis that of the 3rd quarter, or up at a 4.35% annual rate...to figure the effect of that change on GDP,  we figure the difference between the third quarter average and October and take the annualized result of that as a fraction of annualized 3rd quarter GDP, and find that October construction spending is rising at a rate that would add 0.34 percentage points to 4th quarter GDP, assuming hypothetically that there would be no change over the next two months…

Average Prices for New Homes Sold in October Tops $400 K

the Census report on New Residential Sales for October (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 685,000 homes annually, which was 6.2 percent (±18.0 percent)* above the revised September rate of 645,000 new single family home sales a year and 18.7 percent (±23.5 percent)* above the estimated annual rate that new homes were selling at in October of last year....the asterisks indicates that based on their small sampling, Census could not be certain whether October new home sales rose or fell from those of September, or even from those of 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....with this report; sales new single family homes in September were revised from the annual rate of 677,000 reported last month down to a 645,000 a year rate, while home sales in August, initially reported at an annual rate of 580,000 and revised to a 561,000 a year rate last month, were revised to a 565,000 a year rate with this report, and while July's home sale rate, initially reported at an annual rate of 571,000 and revised from a 580,000 a year rate to a 582,000 a year rate last month, were revised down to a 564,000 annaul 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 55,000 new single family homes sold in October, up from the estimated 50,000 new homes that sold in September and up from the 48,000 that sold in October a year ago.....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in October was $312,800, down from the median sale price of $314,900 in September but up from the median sales price of $302,800 in October a year ago, while the average new home sales price in October was $400,200, up from the $381,100 average sales price in September, and up from the average sales price of $352,200 in October a year ago....a seasonally adjusted estimate of 282,000 new single family houses remained for sale at the end of October, which represents a 4.9 month supply at the October sales rate, down from the reported 5.0 months of new home supply in September...for graphs and additional commentary on this report, see the following two posts by Bill McBride at Calculated Risk: New Home Sales increase to 685,000 Annual Rate in October and A few Comments on October 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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