Sunday, October 28, 2018

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

The key economic release of the past week was the 1st estimate of 3rd quarter GDP from the Bureau of Economic Analysis; other widely watched releases included the advance report on durable goods for September and the September report on new home sales, both from the Census bureau...the week also saw the release of the Chicago Fed National Activity Index (CFNAI) for September, a weighted composite index of 85 different economic metrics, which fell to +0.17 in September from +0.27 in August, which was revised from the +0.18 reported for August last month....that left the 3 month average of the index at +0.21 in September, down from +0.27 in August, which still indicates that national economic activity has been somewhat above the historical trend over the summer months...

  In addition, this week also saw the release of two more regional Fed manufacturing surveys for October: the Richmond Fed Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported its broadest composite index fell to +15 in October from +29 in September, suggesting a more modest pace of growth in that region's manufacturing, and the Kansas City Fed manufacturing survey for October, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, which reported its broadest composite index fell to +8 in October, down from +13 in September and +14 in August, still indicative of growth, but their weakest expansionary reading since December 2016...

3rd Quarter GDP Grew at 3.5% Rate on Consumer Spending, Big Inventories Build

Our economy grew at a 3.5% rate in the 3rd quarter, somewhat slower than the growth rate of the second quarter, as substantial growth in private inventories and stronger personal consumption growth offset the worst trade downturn in US history...the Advance Estimate of 3rd Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US grew at a 3.5% annual rate over the output of the 2nd quarter, when our real output grew at a 4.2% real rate...in current dollars, our third quarter GDP grew at a 4.93% annual rate, increasing from what would work out to be a $20,411.9 billion a year output rate in the 2nd quarter to a $20,659.0 billion annual rate in the 3rd quarter, with the headline 3.5% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 1.7%, aka the GDP deflator, was applied to the current dollar change... as is usual with an advance estimate, the BEA cautions that the source data is incomplete and also subject to revisions, which have averaged +/-0.6% in either direction before the third estimate for the quarter is released, which will be two months from now...also note that September construction and factory inventory data have yet to be reported, and that the BEA assumed a $1.3 billion decrease in residential construction, an $2.5 billion decrease in nonresidential construction, and a $1.3 billion increase in nondurable manufacturing inventories for September before they estimated the 3rd quarter’s output (see Key source data and assumptions (xls)

While we cover the details on the 3rd quarter below, remember that the press release for GDP reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix "real" is used to indicate that each change has been adjusted for inflation using price indexes chained from 2012 prices, and then that all percentage changes in this report are calculated from those '2012 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 1st estimate of 3rd quarter GDP, which we find on the BEA GDP landing page, which also offer links to just the tables on Excel and other technical notes...specifically, we refer to table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 4th quarter of 2014, table 2, which shows the contribution of each of the components to the GDP growth figures for those quarters and years, table 3, which shows both the current dollar value and the inflation adjusted value in 2012 dollars of each of those components, and table 4, which shows the change in the price indexes for each of the GDP components....

Personal consumption expenditures (PCE), which accounts for more than 69% of GDP, grew at a 5.6% rate in current dollars in the 3rd quarter, which worked out to a 4.0% real growth rate of consumed goods and services after the 3rd quarter annualized 1.6% PCE price index increase was used to adjust that personal spending for inflation....consumer outlays for durable goods rose at a 5.8% rate while average prices of those durable goods fell at a 1.0% rate, and thus the BEA figured that real growth in output of consumer durables rose at a 6.9% rate, as consumption of recreational goods and vehicles grew at a 12.4% rate and accounted for more than half of the durable goods increase...the BEA also found that real output of consumer non-durable goods rose at a 5.2% rate, after growth in consumer spending for non-durables at a 5.1% rate was adjusted for prices that fell at a 0.1% rate, as strong growth in real consumption of food, clothing and other non-durables more than offset a small pullback in consumption of gasoline and other energy goods...meanwhile, the 5.7% nominal growth in consumer outlays for services was deflated by a 2.5% increase in prices for personal services to show real output of consumer services grew at a 3.2% annual rate, as real health care grew at a 5.8% rate and accounted for roughly 35% of the growth in services...as a result of these changes in growth from the 2nd to the 3rd quarter, the increase in outlays for durable goods added 0.48 percentage points to the GDP growth rate, increased consumption of non-durable goods added 0.72 percentage points, and increased consumption of services added 1.49 percentage points to the growth rate of GDP in the 3rd quarter…

The change in other components of the change in GDP are computed by the BEA in the same manner as we have just illustrated for computing PCE; ie, the annualized increase in current dollar spending for the quarter is adjusted with the annualized inflation factor for that component, yielding the change in real units of goods or services produced during the quarter at an annual rate....thus, real gross private domestic investment, which had shrunk at a 0.5% annual rate in the 2nd quarter, grew at a 12.0% annual rate from those levels in the 3rd quarter, entirely on increased inventory accumulation, as real growth in fixed investments shrunk at a 0.3% annual rate in the 3rd quarter, after growing at a 6.4% rate in the 2nd quarter...among fixed investments, real non-residential fixed investment grew at a 0.8% rate, even as real investment in non-residential structures shrunk at a 7.9% rate and subtracted 0.26 percentage points from 3rd quarter GDP, as real investment in equipment grew at a 0.4% rate and added 0.03 percentage points to GDP while real investment in intellectual property grew at 7.9% rate and added 0.35 percentage points to GDP....meanwhile, real residential investment shrunk at a 4.0% rate in the 3rd quarter, after shrinking at a 1.3% rate in the 2nd quarter, and subtracted 0.16 percentage points from 3rd quarter GDP...for an easy to read table as to what's included in each of those GDP investment categories, see the NIPA Handbook, Chapter 6, page 3...

Meanwhile, real private inventories grew by an inflation adjusted $76.3 billion in the quarter, following the inflation adjusted inventory shrinkage at a $36.8 billion rate we saw in the 2nd quarter, and as a result the $113.1 billion quarter over quarter increase in real inventory growth added 2.07 percentage points to the 3rd quarter's growth rate, after a decrease in real inventory growth at a $67.2 billion rate in the 2nd quarter had subtracted 1.17 percentage points from that quarter's GDP growth....however, since greater growth in inventories indicates that more of the goods produced during the quarter were left in storage or "sitting on the shelf”, their increase by an inflation adjusted $113.1 billion in turn means that real final sales of GDP were actually smaller by that amount, and hence real final sales of GDP only rose at a 1.4% rate in the 3rd quarter, down from the real final sales growth rate of 5.4% in the 2nd quarter, when the decrease in inventory growth meant that growth in real final sales was greater than the real growth in GDP...

Real exports decreased in the 3rd quarter while real imports increased, thus decreasing the portion of our investment and consumption that was domestically sourced...our real exports of goods and services contracted at a 3.5% rate in the third quarter, after our exports had increased at a 9.3% rate in the 2nd quarter, while our real imports grew at a 9.1% rate in the 3rd quarter after shrinking at a 0.6% rate in the 2nd quarter...as you'll recall, our exports are added to GDP because they are part of our production that was not consumed or added to investment in our country (& hence not counted elsewhere in this GDP calculation), while increases in imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn't have been because it was not produced in the US....thus the 3rd quarter decrease in real exports subtracted 0.45 percentage points from 3rd quarter GDP, while the much higher 3rd quarter imports subtracted 1.34 percentage points from 3rd quarter GDP, and hence our deteriorating trade balance subtracted a net of 1.78 (rounded) percentage points from 3rd quarter GDP, after our improved trade deficit had added 1.22 percentage points in the second quarter…

Finally, real consumption and investment by government increased at a 3.3% annual rate in the 3rd quarter, after growing at a 2.5% rate in the 2nd quarter, as real federal government consumption and investment grew at a 3.3% rate and real state and local consumption and investment grew at a 3.2% rate.  Inflation adjusted federal spending for defense rose at a 4.6% rate and that added 0.17 percentage points to 2nd quarter GDP growth, while real non-defense federal consumption and investment grew at a 1.5% rate and added 0.04 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 government investment and consumption expenditures, which grew at a 3.2% annual rate, added 0.35 percentage points to the quarter's growth rate, as an increase in real state and local investment at a 12.5% rate accounted for two-thirds of that increase... 

September Durable Goods: New Orders Up 0.8%, Shipments Up 1.3%, Inventories Up 0.7%

The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for September (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods rose by $2.0 billion or 0.8 percent to $262.1 billion in September, after August's new orders were revised from the $259.6 billion reported last month to $260.1 billion, now 4.6% greater than July's orders, revised from last month's reported 4.5% increase...however, year to date new orders are now 8.9% above those of 2016, slipping from the 9.2% year to date change we saw in this report last month....the volatile monthly change in new orders for transportation equipment led the September orders increase, as new transportation equipment orders rose $1.8 billion or 1.9 percent to $97.4 billion, on a 119.1% increase to $11,697 million in new orders for defense aircraft....excluding orders for transportation equipment, other new orders only rose 0.1%, and excluding just new orders for defense equipment, new orders decreased 0.6%....meanwhile, new orders for nondefense capital goods less aircraft, a proxy for equipment investment, slipped $63 million or 0.1 percent to $69,624 million...

The seasonally adjusted value of September shipments of durable goods, which were ultimately included as inputs into various components of 3rd quarter GDP after adjusting for changes in prices, increased by $3.3 billion or 1.3 percent to $256.8 billion, after August shipments were revised from from $253.1 billion to $253.5 billion, now up 0.9% from July....a $2.9 billion or 3.3 percent to $89.4 billion in shipments of transportation equipment led the increase, without which all other shipments rose 0.3%...at the same time, shipments of nondefense capital goods less aircraft were statistically unchanged at $68.8 billion for the second month in a row, after rising 1.2% in July..

Meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the 20th time in 21 months, increasing by $2.8 billion or 0.7 percent to $410.7 billion, after August inventories were revised from $407.0 billion to $407,882 million, now just 0.2% lower than the prior month...an increase in inventories of transportation equipment were also a factor in the September inventory increase, as they rose $1.2 billion or 0.9 percent to $130.5 billion...

Finally, unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but volatile new orders, were up for the tenth time in 11 months, rising by $9.4 billion or 0.8 percent to $1,186.1 billion, after August unfilled orders were revised from $1,176.5 billion to $1,176.66 billion, still a 0.9% increase from July...a $7.9 billion or 1.0 percent to $818.7 billion increase in unfilled orders for transportation equipment was responsible for most of the increase, as unfilled orders excluding transportation equipment orders rose 0.4% to $367,392 million....compared to a year earlier, the unfilled order book for durable goods is now 5.0% above the level of last September, with unfilled orders for transportation equipment 4.9% above their year ago level, partially on a 9.1% increase in the backlog of orders for defense aircraft...  

New Home Sales Reported Lower After 3 Prior Months Revised Lower

The Census report on New Residential Sales for September (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 553,000 annually, which was s 5.5 percent (±12.1 percent)* below the revised annual pace of 585,000 that new single family homes were selling at in August and 13.2 percent (±13.6 percent)* below the estimated annual rate that new homes were selling at in September of last year....the asterisks indicate that based on their small sampling, Census could not be certain whether September new home sales rose or fell from those of August, 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....hence, the estimates provided in these initial new home sales reports are not very reliable and often see significant revisions...with this report; sales of new single family homes in August were revised from the annual rate of 629,000 reported last month down to a 585,000 a year rate, while home sales in July, initially reported at an annual rate of 627,000 and revised to a 608,000 a year rate last month, were revised further down to a 603,000 a year rate with this report, and while June's annualized home sale rate, initially reported at an annual rate of 631,000 and revised from the first revision at a 638,000 a year rate to a 618,000 a year rate last month, were revised down to a 612,000 a year 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 41,000 new single family homes sold in September, down from the estimated 46,000 new homes that sold in August and the estimated 52,000 that sold in July....the raw numbers from Census field agents further estimated that the median sales price of new houses sold in September was $320,000, up from the median sale price of $319,200 in August but down from the median sales price of $331,500 in September a year ago, while the average September new home sales price was $377,200, down from the $384,500 average sales price in August, and down from the average sales price of $379,300 in September a year ago....a seasonally adjusted estimate of 327,000 new single family houses remained for sale at the end of September, which represents a 7.1 month supply of homes at the September sales rate, up from the 6.1 months supply of new homes originally reported for August...for graphs and additional commentary on this report, see the following two posts by Bill McBride at Calculated Risk: New Home Sales decrease sharply to 553,000 Annual Rate in September and A few Comments on September New Home Sales... ​ ​

 

(the above is the synopsis that accompanied my regular sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in receiving my weekly emailing of selected links, most picked from the aforementioned GGO posts, contact me…)      

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