The key economic reports released over the past week were the 2nd estimate of 3rd quarter GDP and the October report on Personal Income and Spending, both from the Bureau of Economic Analysis; other widely watched releases included the October report on new home sales from the Census bureau and 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…they reported that home prices nationally for those 3 months averaged 5.5% higher than prices for the same homes that sold during the same 3 month period a year earlier, down from the 5.7% year over year index increase shown in the prior report...
The week also saw the release of the Chicago Fed National Activity Index (CFNAI) for October, a weighted composite index of 85 different economic metrics, which rose to +0.24 in October from +0.14 in September, revised from the +0.17 that had been reported for September last month....as a result, the 3 month average of the CFNAI rose to +0.31 in October, up from a revised +0.30 in September, which indicates that national economic activity has been somewhat above the historical trend over those recent months....
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 slipped to +14 in November, down from +15 in October, still suggesting an ongoing expansion of that region's manufacturing, while the Dallas Fed Texas Manufacturing Outlook Survey reported its general business activity index fell to +17.6 in November from +29.4 in October, indicative of a moderation of the expansion of the Texas economy...
3rd Quarter GDP Grew at a 3.5% Rate, but Two-Thirds of That was Inventories
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 3.5% rate in the quarter, revised but statistically unchanged from from the 3.5% growth rate reported in the advance estimate a month ago, largely because downward revisions to personal consumption, exports, and state and local spending were completely offset by upward revisions to non-residential fixed investment and inventory investment....in current dollars, our third quarter GDP grew at a 4.96% 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 $20,660.3 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....
Remember that the GDP 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 2012, 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 3rd estimate of 3rd quarter GDP, which we find on the BEA GDP landing page, which also offers links to just the tables on Excel and other technical notes...specifically, we reference table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 3rd quarter of 2013; table 2, which shows the contribution of each of the components to the GDP figures for those months and years; table 3, which shows both the current dollar value and inflation adjusted value of each of the GDP components; and table 4, which shows the change in the price indexes for each of the components...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 4.0% growth rate reported last month to a 3.6% rate in this 2nd estimate…that growth rate figure was arrived at by deflating the 5.19% 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 revised from the 1.6% PCE inflation rate reported a month ago...real consumption of durable goods grew at a 3.9% annual rate, which was revised from the 6.9% growth rate shown in the advance report, and added 0.28 percentage points to GDP, as consumption of motor vehicles was revised to show a small contraction while an increase in real consumption of recreational goods and vehicles at a 9.1% rate accounted for more than half the durables goods increase...real consumption of nondurable goods by individuals grew at a 5.3% annual rate, revised from the 5.2% growth rate reported in the 1st estimate, and added 0.73 percentage points to the 3rd quarter’s economic growth rate, as slightly lower consumption of energy goods was more than offset by greater consumption of food, clothing and other non-durables….at the same time, consumption of services rose at a 3.1% annual rate, revised from the 3.2% growth rate reported last month, and added 1.45 percentage points to the final GDP tally, as real health care services rose at a 4.2% rate and accounted for a third of the quarter’s growth in services...
Meanwhile, seasonally adjusted real gross private domestic investment grew at a 15.1% annual rate in the 3rd quarter, revised from the 12.0% growth estimate reported last month, as real private fixed investment grew at a 1.4% rate, revised from the 0.3% contraction 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 1.7% rate, not as bad as the 7.9% contraction rate previously reported, and real investment in equipment was revised from growth at a rate of 0.4% to growth at a 3.5% rate, while the quarter's investment in intellectual property products was revised from growth at a 7.9% rate to growth at a 4.3% rate...on the other hand, real residential investment was shown to be shrinking at a 2.6% annual rate, rather than the 4.0% contraction rate previously reported…after those revisions, the decrease in investment in non-residential structures subtracted 0.05 percentage points from the 3rd quarter's growth rate, the increase in investment in equipment added 0.21 percentage points to the quarter's growth rate, lower residential investment subtracted 0.10 percentage points from GDP, while growth in investment in intellectual property added 0.19 percentage points to the growth rate of 3rd quarter GDP...
In addition, investment in real private inventories grew by an inflation adjusted $86.6 billion in the 3rd quarter, revised from the originally reported $76.3 billion of real inventory growth...this came after inventories had shrunk at an inflation adjusted $36.8 billion rate in the 2nd quarter, and hence the $123.5 billion increase in real inventory growth added 2.27 percentage points to the quarter's growth rate, revised from the 2.07 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 QoQ increase by $123.5 billion meant that growth of real final sales of GDP was relatively smaller by that much, and hence real final sales of GDP only rose at a 1.2% 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...
The previously reported decrease in real exports was revised even lower with this estimate, while the previously reported increase in real imports was revised a bit higher, and as a result the change in our net trade was a greater subtraction from GDP rather than was previously reported...our real exports shrunk at a 4.4% rate rather than the 3.5% rate reported in the first estimate, and since exports are added to GDP because they are part of our production that was not consumed or added to investment in our country, their shrinkage conversely subtracted 0.55 percentage points from the 3rd quarter's growth rate, revised from the 0.45 percentage point subtraction shown in the previous report....meanwhile, the previously reported 9.1% increase in our real imports was revised to a 9.2% increase, and since imports are subtracted from GDP because they represent either consumption or investment that was not produced here, their decrease subtracted 1.36 percentage points to 3rd quarter GDP, rather than the 1.34 percentage point subtraction shown last month....thus, our deteriorating trade balance subtracted a total of 1.91 percentage points from 3rd quarter GDP, rather than the (rounded) 1.78 percentage point subtraction that had been indicated by the advance estimate..
Finally, the entire government sector grew at a 2.6% rate, revised from the 3.3% growth rate previously reported, as federal government consumption and investment grew a bit more than initially estimated, while real state & local government consumption and investment grew somewhat slower than had been indicated....real federal government consumption and investment was seen to have grown at a 3.5% rate from the 2nd quarter in this estimate, revised from the 3.3% growth rate shown in the advance estimate, as real federal outlays for defense grew at a 4.9% rate and added 0.18 percentage points to 3rd quarter GDP, revised from the 4.6% growth rate shown previously, while all other federal consumption and investment grew at an unrevised 1.5% rate and added 0.04 percentage points to 3rd quarter GDP....meanwhile, real state and local consumption and investment grew at a 2.0% rate in the quarter, which was revised from the 3.2% growth rate reported in the 1st estimate, and added 0.22 more percentage points to 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 0.5% in October, Personal Spending up 0.6%, PCE Price Index up 0.2%
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 69.4% 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 change reported for each of those metrics is not the current monthly change; rather, they're seasonally adjusted amounts expressed at an annual rate, ie, they tell us how much income and spending would change over a year if October's change in seasonally 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 news release for this report tell us "Personal income increased $84.9 billion (0.5 percent) in October ", they mean that the annualized figure for seasonally adjusted personal income in October, $17,776.0 billion, was $84.9 billion, or a bit less than 0.5% greater than the annualized personal income figure of $17,691.1 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 a bit more than 0.5%, from an annual rate of $15,618.8 billion in September to an annual rate of $15,700.5 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 $84.9 billion annual rate of increase in personal income were a $27.8 billion increase in wages and salaries and a $25.2 billion increase in farm and business proprietors' incomes…
For the personal consumption expenditures (PCE) that we're most interested in, BEA reports that they increased at a $86.9 billion rate, or by more than 0.6%, as the annual rate of PCE rose from $14,090.6 billion in September to $14,177.5 in October....September PCE was revised from $14,124.2 billion annually to $14,090.6 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)....total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $90.8 billion to $14,732.7 billion annually in October, which left total personal savings, which is disposable personal income less total outlays, at a $967.8 billion annual rate in October, down a bit from the revised $976.9 billion annualized personal savings in September... as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, slipped to 6.2% in October from the revised September savings rate of 6.3%...
As you know, before personal consumption expenditures are used in the computation of GDP, 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 2012 prices = 100, which is included in Table 9 in the pdf for this report...that index was at 108.772 in October, up from 108.576 in September, giving us a PCE price index change and inflation adjustment of 0.1805% in October, which the BEA rounded to +0.2% 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 those chained 2012 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 13,034.7 billion annually, 0.4361% more than September's 12,978.1 billion, a difference that the BEA reports as +0.4%...
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 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 12,957.2 billion in chained 2012 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 13,034.7 billion to the 3rd quarter real PCE figure of 12,957.2 billion, we find that October real PCE has grown at a 2.41% annual rate from that of 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 1.68 percentage points to the GDP growth rate of the 4th quarter...
New Home Sales Down in October After Prior Months Sales Revised Higher
The Census report on New Residential Sales for October (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 544,000 homes annually, which was 8.9 percent (±13.7 percent)* below the revised September rate of 597,000 new single family home sales annually and 12.0 percent (±13.1 percent)* below the estimated annual rate that new homes were selling at in October of last year....the asterisks indicate 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 of new single family homes in September were revised from the annual rate of 553,000 reported last month up to a 597,000 a year rate, while home sales in August, initially reported at an annual rate of 629,000 and revised to a 585,000 a year rate last month, were revised to a 591,000 a year rate with this report, and while July's home sale rate, initially reported at an annual rate of 627,000 and revised from a 608,000 a year rate to a 603,000 a year rate last month, were revised up to a 606,000 annual 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 42,000 new single family homes sold in October, down from the estimated 45,000 new homes that sold in September and down from the 49,000 homes 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 $309,700, down from the median sale price of $321,300 in September and down from the median sales price of $319,500 in October a year ago, while the average new home sales price in October was $395,000, up from the $379,000 average sales price in September, and up from the average sales price of $394,000 in October a year ago....a seasonally adjusted estimate of 336,000 new single family houses remained for sale at the end of October, which represents a 7.4 month supply at the October sales rate, up from the revised 6.5 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 decrease to 544,000 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 picked from the aforementioned GGO posts, contact me…)
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