Sunday, March 4, 2018

4th quarter GDP revision, January’s income and outlays, construction spending, durable goods, & new home sales

the key economic reports released the past week were the 2nd estimate of 4th quarter GDP and the January report on Personal Income and Spending from the Bureau of Economic Analysis; other widely watched releases included the advance report on durable goods for January, the January report on Construction Spending, and the January report on new home sales, all from the Census bureau....we also had the release of the Chicago Fed National Activity Index (CFNAI) for January, a weighted composite index of 85 different economic metrics, which fell to +0.12 in January from +0.14 in December, which was revised from the +0.27 reported for December last month...after revisions to the CFNAI over the past 6 months, the 3 month average of that index fell to to +0.17 in January from a revised +0.43 in December, which still indicates that national economic activity has been slightly above the historical trend over recent months...

this week also saw the release of the last two regional Fed manufacturing surveys for February: the Dallas Fed Texas Manufacturing Outlook Survey reported their general business activity composite index rose to +37.2 from last month's +33.4, a 12 year high, suggesting a boom like expansion in the energy industry dominated Texas 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 +28 in February from +14 in January, the second highest reading on record, also suggesting an accelerating robust expansion in that region's manufacturing...

privately issued reports released this week included the light vehicle sales report for February from Wards Automotive, which estimated that vehicles sold at a 16.96 annual rate in February, down 0.6% from the 17.07 million annual sales rate in January, and down 2.9% from the 17.47 million annual sales rate in February a year ago; the Case-Shiller Home Price Index for December from S&P Case-Shiller, which reported that home prices nationally during October, November and December averaged 6.3% higher than prices for the same homes that sold during the same 3 month period a year earlier, and the widely followed purchasing manager's survey from the Institute for Supply Management (ISM): the February Manufacturing Report On Business indicated that the manufacturing PMI (Purchasing Managers Index) rose to 60.8% in February, up from 59.1% in January, which suggests a stronger expansion in manufacturing firms nationally..

4th Quarter GDP Revised to Show Growth at a 2.5% Rate

the Second Estimate of our 4th Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 2.5% rate in the quarter, revised down from the 2.6% growth rate reported in the advance estimate last month, as growth of investment in inventories was revised lower and federal government spending was revised down from the prior estimate.... the revision to two decimal places, however, shows the change was statistically insignificant, from growth of just over 2.55% in the first estimate, to growth of 2.54% in this estimate…in current dollars, our fourth quarter GDP grew at a 4.9% annual rate, increasing from what would work out to be a $19,500.6 billion a year output rate in the 3rd quarter to a $19,736.5 billion annual rate in the 4th quarter, with the headline 2.5% annualized rate of increase in real output arrived at after annualized inflation adjustments averaging 2.3%, known in aggregate as the GDP deflator, were 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 the change that 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 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 the 1st quarter of 2014; 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 for 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 4th quarter advance estimate, which this estimate revises, is here...

real personal consumption expenditures (PCE), the largest component of GDP, were revised but continued to show their aggregate growth at a 3.8% annual rate in the 4th quarter, the same as was reported last month…that growth rate was arrived at by deflating the annualized dollar amount of consumer spending with the PCE price index, which indicated consumer inflation grew at a 2.7% annual rate in the 4th quarter, which was revised from the 2.8% inflation rate that was applied to PCE in the first estimate...real consumption of durable goods grew at a 13.8% annual rate, which was revised from the 14.2% growth rate indicated in the advance report, and added 0.99 percentage points to GDP, as real output of motor vehicles grew at a 18.9% annual rate and accounted for 0.45 percentage points of that durable goods growth.....real consumption of nondurable goods by individuals rose at a 4.3% annual rate, revised from the 5.2% increase reported in the 1st estimate, and added 0.62 percentage points to 4th quarter economic growth, as lower consumption of energy goods was the only drag on the quarter’s non-durables growth...meanwhile, consumption of services grew at a 2.1% annual rate, revised from the 1.8% rate reported last month, and added 0.97 percentage points to the final GDP tally, as increases in the real output of housing and utilities and health care services accounted for more than half of the 4th quarter increase in services...

seasonally adjusted real gross private domestic investment grew at a 3.5% annual rate in the 4th quarter, revised from the 3.6% growth estimate made last month, as real private fixed investment was revised from growth at a 7.9% rate to growth at a 8.1% rate, while real inventory growth was smaller than previously estimated...investment in non-residential structures was revised from growth at a 1.4% rate to growth at a 2.5% rate, while real investment in equipment was revised to show growth at a 11.8% rate, revised from the 11.4% growth rate previously reported...meanwhile, the 4th quarter's investment in intellectual property products was revised from growth at a 4.5% rate to growth at a 2.4% rate, and the growth rate of residential investment was revised from 11.6% to 13.0% annually…after those revisions, the increase in investment in non-residential structures added 0.07 percentage points to the economy's growth rate, investment in equipment added 0.64 percentage points, investment in intellectual property added 0.10 percentage points , and growth in residential investment added 0.47 percentage points to the change in the growth rate of 4th quarter GDP...

meanwhile, the growth in real private inventories was revised from the originally reported $9.2 billion in inflation adjusted growth to show that inventory grew at an inflation adjusted $8.0 billion rate….that came after inventories had grown at an inflation adjusted $38.5 billion rate in the 3rd quarter, and hence the $30.5 billion negative change in real inventory growth from the 3rd quarter to the 4th subtracted 0.70 percentage points from the 4th quarter's growth rate, revised from the 0.67 percentage point subtraction from GDP due to the slower inventory growth reported in the advance estimate....since a smaller growth of inventories indicates that less of the goods produced during the quarter were left in a warehouse or sitting on the shelf, their decrease at a $30.5 billion rate conversely meant that real final sales of GDP were actually greater by that much, and hence real final sales of GDP grew at a 3.3% rate in the 4th quarter, revised from the 3.2% growth rate shown in the advance estimate, compared to the real final sales increase at a 2.4% rate in the 3rd quarter, when the greater increase in inventory growth meant that the quarter’s growth in real final sales was lower....

both our imports and exports were revised higher by similar amounts in this estimate, and as a result our net trade was little changed from what was previously reported...our real exports grew at a 7.1% rate rather than the 6.9% rate reported in the first estimate, and since exports are added to GDP because they are part of our production that is not included in GDP domestic consumption or investment metrics, their growth added 0.84 percentage points to the 4th quarter's growth rate....meanwhile, the previously reported 13.9% growth rate of our real imports was revised to an 14.0% growth, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their growth subtracted 1.97 percentage points from 4th quarter GDP....thus, our weakening trade balance subtracted a net 1.13 percentage points from 4th quarter GDP, the same GDP subtraction resulting from foreign trade that was indicated in the advance estimate..

finally, there was also a downward revision to real government consumption and investment in this 2nd estimate, as the real growth rate for the entire government sector was revised from a 3.0% rate to a 2.9% rate...real federal government consumption and investment was seen to have grown at a 3.2% rate in this estimate, revised from the 3.5% growth rate shown in the advance estimate, as real federal outlays for defense grew at a 5.6% rate and added 0.21 percentage points to 4th quarter GDP, revised from the 6.0% growth rate shown previously, while all other federal consumption and investment was revised from a 0.1% growth rate to statistically unchanged and hence had no impact on 4th quarter GDP...meanwhile, real state and local consumption and investment was revised from growth at a 2.6% rate in the first estimate to growth at a 2.7% rate in this estimate, as state and local investment spending grew at a 13.9% rate and added 0.23 percentage points to 4th quarter GDP, while state and local consumption spending grew at a 0.6% rate and added 0.06 percentage points to GDP...note that government outlays for social insurance are not included in this government 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 January, Personal Spending up 0.2%, PCE Price Index up 0.4%

at nearly 70% of GDP, our personal consumption expenditures is usually the key 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 is not the current monthly change; rather, the amounts are seasonally adjusted and at an annual rate, ie, in January's case those metrics tell us what income and spending would be for a year if January's adjusted income and spending were extrapolated over an entire year...however, the percentage changes are computed monthly, and in this case of this month's report they give us the percentage change in each annual metric from December to January...

thus, when the opening line of the press release for this report tell us "Personal income increased $64.7 billion (0.4 percent) in January", they mean that the annualized figure for personal income in January, $16,783.6 billion, was $63.0 billion, or a bit less than 0.4% greater than the annualized  personal income figure of $16,718.9 billion for December; the actual change in personal income from December to January is not given...similarly, annualized disposable personal income, which is income after taxes, rose by more than 0.9%, from an annual rate of an annual rate of $14,596.0 billion in December to an annual rate of $14,730.8 billion in January, largely due to the recent changes in the tax code...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 January, the largest contributors to the $64.7 billion annual rate of increase in personal income were a $45.2 billion increase in wages and salaries and a $36.1 billion increase in personal current transfer receipts, mostly social security, while at the same time interest and dividend income fell $9.0 billion...

for the January personal consumption expenditures (PCE) that will be included in 1st quarter GDP, BEA reports that they increased by $31.2 billion, or 0.2%, which means that personal consumption expenditures rose from a $13,711.9 billion annual rate in December to a $13,743.1 billion annual rate in January; at the same time, the December PCE figure was revised up from the originally reported $13,717.2 billion annually, a revision that was already incorporated into this week's 4th quarter GDP estimate (this report, although usually released a business day later than the GDP release, is computed concurrently)....total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $38.7 billion to $14,266.4 billion annually in January, which left total personal savings, which is disposable personal income less total outlays, at a $464.4 billion annual rate in January, up from the revised $363.2 billion in annualized personal savings in December... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 3.2% in January from the December savings rate of 2.5%, which had been a post recession low...

as you know, before January's personal consumption expenditures are used in the 1st quarter 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 included in Table 9 in the pdf for this report, which is a chained price index based on 2009 prices = 100....that PCE price index rose from 113.646 in December to 114.064 in January, giving us a month over month inflation rate of 0.3678%, which BEA rounds to a 0.4% increase in reporting it here....then, applying that 0.3678% inflation adjustment to the smaller increase in January PCE means that real PCE actually fell by 0.13995% in January, which the BEA reports as a 0.1% decrease...note that when those PCE price indexes are applied to a given month's annualized PCE in current dollars, it gives us 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 January's chained dollar consumption total works out to 12,049.2 billion annually, 0.14% less than December's 12,066.2 billion, statistically the same as the real PCE decrease we just computed..

however, to estimate the impact of the change in January PCE on the change in GDP, the change from December doesn't help us much, since GDP is reported quarterly...thus we have to compare January'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 4th quarter was represented by 12,027.9 billion in chained 2009 dollars..(ie, that's the same as what's shown in table 3 of the pdf for the 4th quarter GDP report)....when we compare January's real PCE representation of 12,049.2 billion to the 4th quarter real PCE figure of 12,027.9 billion, we find that real PCE is growing at a 0.7% annual rate so far in the 1st quarter....that’s a rate that would mean that if January real PCE does not improve during February and March, growth in PCE would just add 0.48 percentage points to the growth rate of the 1st quarter...

Construction Spending Unchanged in January after December and November Revised Higher   

the Census Bureau's report on January construction spending (pdf) estimated that January's seasonally adjusted construction spending would work out to $1,262.8 billion annually if extrapolated over an entire year, which was statically unchanged (±1.0%)* from the revised annualized estimate of $1,262.7 billion for construction spending in December, but 3.2 percent (±1.3 percent) above the estimated annualized level of construction spending of January last year...the December spending estimate was revised 0.75% higher, from $1,253.3 billion to $1,262.7 billion, while November's annualized construction spending was revised from $1,245.1 billion to $1,252,144 million...the combined upward revisions of $16.44 billion to annualized November and December construction spending figures would be averaged over the 3 months of the 4th quarter and therefore increase the quarter's annualized construction spending by around $5.5 billion, and would thus imply an upward revision of about 0.15 percentage points to fourth quarter GDP when the third estimate is released at the end of March...

quoting details on types of construction spending directly from the Census release: Spending on private construction was at a seasonally adjusted annual rate of $962.7 billion, 0.5 percent (± 0.7 percent)* below the revised December estimate of $967.9 billion. Residential construction was at a seasonally adjusted annual rate of $523.2 billion in January, 0.3 percent (±1.3 percent)* above the revised December estimate of $521.8 billion. Nonresidential construction was at a seasonally adjusted annual rate of $439.6 billion in January, 1.5 percent (± 0.7 percent) below the revised December estimate of $446.2 billion.   In January, the estimated seasonally adjusted annual rate of public construction spending was $300.1 billion, 1.8 percent (±1.8 percent)* above the revised December estimate of $294.8 billion. Educational construction was at a seasonally adjusted annual rate of $76.7 billion, 2.1 percent (±3.8 percent)* above the revised December estimate of $75.2 billion. Highway construction was at a seasonally adjusted annual rate of $92.6 billion, 4.4 percent (±4.6 percent)* above the revised December estimate of $88.8 billion.

as you can see from that, construction spending would input 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 January’s construction spending reported in this release on 1st 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 just 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 0.8% in January, after they had fallen 0.1% in December and by 0.2% in November...

on that basis, we can thus estimate that January construction costs were roughly 0.7% more than those of November, and 0.5% more than October, and of course, 0.8% more than December...we then use those percentages to inflate the lower priced spending figures for each of the 4th quarter months and compare them to January, which is arithmetically the same as deflating January construction spending, for purposes of comparison.…this report gives annualized construction spending in millions of dollars for the 4th quarter months as $1,262,701 in December, $1,252,144 in November, and $1,237,649 in October...thus to compare January's nominal construction spending of $1,262,784 million to inflation adjusted figures of the fourth quarter, our formula becomes: (1,262,784 / (((1,262,701 *1.008)+( 1,252,144 * 1.007) + (1,237,649 *1.005)) / 3) = 1.0028598, that adjusted for inflation, construction spending in January was up 0.286% vis a vis that of the 4th quarter, or up at a 1.15% annual rate...then, to figure the potential effect of that change on GDP, we take the difference between the 4th quarter inflation adjusted average and January's inflation adjusted spending as a fraction of inflation adjusted 4th quarter GDP, and find that January construction spending is rising at a rate that would add about 0.09 percentage points to 1st quarter GDP, if there is no improvement in real construction over the next two months..

January Durable Goods: New Orders Down 3.7%, Shipments Up 0.2%, Inventories Up 0.3%

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for January (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods fell by $9.2 billion or 3.7 percent to $239.7 billion in January, after December's new orders were revised from the $249.4 billion reported last month to $248.9 billion, now 2.6% greater than November's new orders, revised from the 2.9% previously reported...however, January's new orders were still 8.9% higher than those of January 2017...the volatile monthly new orders for transportation equipment were responsible for the January decrease, as new transportation equipment orders fell $8.6 billion or 10.0 percent to $77.7 billion, on a 28.4% decrease to $10,376 million in new orders for commercial aircraft and a a 45.6% decrease to $2,760 million in new orders for defense aircraft....excluding orders for transportation equipment, new orders fell 0.3%, while excluding just new orders for defense equipment, new orders fell 2.7%.... at the same time, new orders for nondefense capital goods less aircraft, a proxy for equipment investment, fell $146 million or 0.2% to $66,695 million...

meanwhile, the seasonally adjusted value of January shipments of durable goods, which will included as inputs into various components of 1st quarter GDP after adjusting for changes in prices, increased by $0.6 billion or 0.2 percent to $247.2 billion, after the value of December shipments was revised from from $246.8 billion to $246.4 billion, now up 0.5% from November...greater shipments of transportation equipment led the January increase, as they rose $0.4 billion or 0.5 percent to $81.3 billion...at the same time, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose by $1.3 billion or 0.3 percent to $408.5 billion, after December inventories were revised from $406.5 billion to $407.3 billion, now up 0.5% from November....once again, it was inventories of transportation equipment that led the increase, as they rose $0.7 billion or 0.5 percent to $131.9 billion...

finally, unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but obviously volatile monthly new orders, fell for the first time in 5 months, decreasing by $3.1 billion or 0.3 percent to $1,140.9 billion, following a December increase of 0.6% to $1,143,957 million, which was previously reported as a 0.6% increase to $1,144.1 billion...a $3.6 billion or 0.5 percent drop to $771.8 billion in unfilled orders for transportation equipment was responsible for the decrease, as unfilled orders excluding transportation equipment orders were up 0.1% to $369,089 million...the unfilled order book for durable goods is still 1.9% above the level of last January, with unfilled orders for transportation equipment now 0.7% above their year ago level, mostly on a 7.6% increase in the backlog of orders for motor vehicles... 

January New Home Sales Reported Lower Than in December and a Year Ago

the Census report on New Residential Sales for January (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 593,000 homes annually, which was 7.8 percent (±19.0 percent)* below the revised December annual sales rate of 643,000 new homes and 1.0 percent (±16.4 percent)* below the estimated 599,000 annual rate that new single family homes were selling at in January of last year....the asterisks indicate that based on their small sampling, Census could not be certain whether January new home sales rose or fell from those of December, or even from January sales 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 of new single family homes in December were revised from the annual rate of 625,000 reported last month to an annual rate of 643,000, and new home sales in November, initially reported at an annual rate of 733,000 and revised to a 689,000 rate last month, were revised back up to a 696,000 a year rate with this report, while October's annualized new home sales rate, initially reported at an annual rate of 685,000 and revised down to a 624,000 a year rate last month, were revised further down to a 616,000 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 44,000 new single family homes sold in January, down from the estimated 45,000 new homes that sold in December and the 49,000 that sold in November....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in January was $323,000, down from the median sale price of $336,700 in December but up from the median sales price of $315,200 in January a year ago, while the average January new home sales price was $382,700, down from the $394,600 average sales price in December, but up from the average sales price of $357,700 in January a year ago....a seasonally adjusted estimate of 299,000 new single family houses remained for sale at the end of January, which represents a 6.8 month supply at the January sales rate, up from the 5.7 months of new home supply reported in December, and up from the reported 4.6 months of new home supply in November...for graphs and additional commentary on this report, see the following two posts by Bill McBride at Calculated Risk: New Home Sales decrease to 593,000 Annual Rate in January and A few Comments on January 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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