Sunday, June 2, 2019

1st quarter GDP revision; April’s personal income and outlays

The key economic releases of the past week were the second estimate of 1st quarter GDP from the Bureau of Economic Analysis, and the April report on Personal Income and Spending, also from the BEA, which provides 23% of 2nd quarter GDP....in addition, the last two regional Fed manufacturing surveys for May were also released this week: 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 inched up to +5 from last month's +3, still indicating pretty sluggish growth in that region's manufacturing, while the Dallas Fed released the Texas Manufacturing Outlook Survey, which indicated its general business activity index fell to -5.3 from +2.0 in April, it's worst reading since 2016 and indicating contraction of the Texas economy....this week also saw the release of the March Case-Shiller Home Price Index, which is a relative average of January, February & March home prices compared to those of previous 3 month periods; the Case Shiller index indicated that home prices nationally for those 3 months averaged 3.7% higher than prices for the same homes that sold during the same 3 month period a year earlier, down from the 4.0% year over year gain reported for the February index a month ago..

1st Quarter GDP Revised to Show Growth at a 3.1% Rate

The Second Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 3.1% rate in the 1st quarter, revised from the 3.2% growth rate reported in the advance estimate last month, as growth of real fixed investment and of inventories were revised lower while growth of real personal consumption expenditures was revised higher and while an upward revision to exports was more than offset by a smaller decrease in imports than had previously been reported....in current dollars, our first quarter GDP grew at a 3.57% annual rate, increasing from what would work out to be a $20,865.1 billion a year output rate in the 4th quarter of last year to a $21,048.8 billion annual rate in the 1st quarter of this year, with the headline 3.1% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 0.8%, aka the GDP deflator, was computed and applied to the current dollar change...

As we review this month's revisions, remember 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 from one 3 month period to the next, and that the prefix "real" is used to indicate that each change has been adjusted for inflation using price changes now 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 Full Release & Tables for the second estimate of 1st quarter GDP, which is linked to on the BEA's main GDP page...specifically, we’ll be using table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 2nd quarter of 2012; 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 GDP components...the full pdf for the 1st 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 1.2% growth rate reported last month to indicate PCE growth a 1.3% rate with this estimate…that growth figure was arrived at by deflating the 1.7% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated consumer inflation grew at a 0.4% annual rate in the 1st quarter, which was revised from the 0.6% PCE inflation rate published a month ago...real consumption of durable goods fell at a 4.6% annual rate, which was revised from the 5.3% drop shown in the advance report, and subtracted 0.33 percentage points from GDP, as a drop in real consumption of automobiles at a 15.9% rate more than offset a modest increase in real consumption of recreational goods and vehicles.....real consumption of nondurable goods by individuals rose at a 2.0% annual rate, revised from the 1.7% increase reported in the 1st estimate, and added 0.27 percentage points to 1st quarter economic growth, with decreased real consumption of food and clothing more than offset by greater growth in real consumption of other nondurables except for energy, which was unchanged….at the same time, consumption of services rose at a 2.1% annual rate, revised from the 2.0% growth rate reported last month, and added 0.96 percentage points to the final GDP tally, led by real growth of health care and financial services...

At the same time, seasonally adjusted real gross private domestic investment grew at a 4.3% annual rate in the 1st quarter, revised from its 5.1% growth estimate reported last month, as real private fixed investment grew at a 1.0% rate, rather than at the 1.5% rate reported in the advance estimate, while inventory growth was somewhat less than had been previously estimated...real investment in non-residential structures was revised from shrinking at a 0.7% rate to growth at a 0.8% rate, while real investment in equipment was revised to show it contracted at a 1.0% rate, a reversal of the 0.2% growth rate previously reported...at the same time, the quarter's investment in intellectual property products was revised from real growth at a 8.6% rate to real growth at a 7.2% rate...the contraction in real residential investment was also revised downward, from shrinking at a 2.8% annual rate to shrinking at a 3.5% rate…after those revisions, the increase in investment in non-residential structures added 0.05 percentage points to the 1st quarter's growth rate, the decrease in investment in equipment subtracted 0.06 percentage points from the quarter's growth, the increase in investment in intellectual property added 0.32 percentage points, while the contraction in residential investment subtracted 0.13 percentage points from the increase in 1st quarter GDP...

Meanwhile, the growth in real private inventories was revised from the originally reported $128.4 billion in inflation adjusted dollars to show inventory grew at an inflation adjusted $125.5 billion rate...this came after inventories had grown at an inflation adjusted $96.8 billion rate in the 4th quarter, and hence the revised $28.7 billion increase in real inventory growth over that of the 4th quarter added 0.60 percentage points to the 1st quarter's growth rate, revised from the 0.65 percentage point addition from inventory growth shown in the advance estimate....however, since growth in inventories indicates that more of the goods produced during the quarter were left "sitting on the shelf” or in a warehouse, that increase by $28.7 billion meant that real final sales of GDP were actually smaller by that much, and therefore the BEA found that real final sales of GDP rose at a 2.5% rate in the 1st quarter, same as the real final sales rate shown in the advance estimate due to rounding...

The previously reported increase in real exports was revised higher with this estimate, while the previously reported decrease in real imports was revised lower by a greater amount, and as a result our net trade was a somewhat smaller addition to GDP rather than was previously reported...our real exports grew at a 4.8% rate, revised from the 3.7% rate shown in 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 increase added 0.58 percentage points to the 1st quarter's growth rate, revised from the 0.45 percentage point addition shown last month...meanwhile, the previously reported 3.7% decrease in our real imports was revised to a 2.5% decrease, and since imports subtract from GDP because they represent either consumption or investment that was not produced in the US, their decrease conversely added 0.39 percentage points to 1st quarter GDP, revised from the 0.58 addition shown a month ago....thus, our improving trade balance added a rounded 0.96 percentage points to 1st quarter GDP, reduced from the 1.03 percentage point addition resulting from our improving foreign trade balance that was indicated by the advance estimate..

Finally, there was also a small upward revision to real government consumption and investment in this 2nd estimate, as the entire government sector is now shown growing at a 2.5% rate, revised from the 2.4% growth rate for government indicated by the 1st estimate....however, real federal government consumption and investment was seen to have shrunk at a 0.1% rate from that of the 4th quarter in this estimate, which was revised from the unchanged growth rate shown in the 1st estimate, as real federal outlays for defense grew at a 4.0% rate, revised from the previously reported 4.1% growth and added 0.15 percentage points to 1st quarter GDP, while all other federal consumption and investment shrunk at an unrevised 5.9% rate and subtracted 0.16 percentage points from GDP...meanwhile, real state and local consumption and investment grew at a 4.0% rate in the quarter, revised from the 3.9% growth shown in the 1st estimate, and added 0.42 percentage points to 1st quarter GDP, which was revised from the 0.41 addition shown in the advance estimate...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, thereby indicating an increase in the output of those goods or services...

April Personal Income Up 0.5%, Personal Spending Up 0.3%, PCE Price Index Up 0.3%

The April 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 more than 69% 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 national income and spending would change over a year if April'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 March to April..

Thus, when the opening line of the April report tell us "Personal income increased $92.8 billion (0.5 percent) in April", that means that the annualized figure for seasonally adjusted national personal income in April, $18,099.1 billion, was $92.8 billion, or a bit more than 0.5% greater than the annualized personal income figure of $18,006.3 billion extrapolated for March; the actual, unadjusted change in personal income from March to April is not given...at the same time, annualized disposable personal income, which is income after taxes, rose by more than 0.4%, from an annual rate of an annual rate of $15,889.3 billion in March to an annual rate of $15,958.6 billion in April....the contributors to the annualized $92.8 billion increase in personal income can be viewed in the Full Release & Tables (PDF) for this release, also as annualized amounts, and were led by a $44.6 billion increase to $2,801.8 billion in interest and dividend income, a $26.5 billion increase to $9,070.2 billion in wages and salaries, and a $17.6 billion increase to $3,173.5 billion in personal current transfer receipts from benefit programs; again, those are all annualized figures...

For the April personal consumption expenditures (PCE) that will be included in 2nd quarter GDP, BEA reports that they increased at a $40.8 billion annual rate, or by less than 0.3%, as the annual rate of national PCE rose from $14,352.5 billion in March to $14,393.4 in April....March PCE was revised from $14,337.5 billion annually to $14,352.5 billion, while February PCE was revised from $14,214.0 billion annually to $14,195.2 billion, revisions that were already included in this week’s GDP report....total personal outlays for April, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $42.7 billion to $14,968.3 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $990.3 billion annual rate in April, up from the revised $963.7 billion in annualized personal savings in March...as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 6.2% in April, after the previously reported 6.5% March savings rate was revised to 6.1%...

As you know, before those 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 2012 prices = 100, which is computed by the BEA and included in Table 9 in the pdf for this report...that index rose from 109.155 in March to 109.496 in April, a month over month inflation rate that's statistically 0.3124%, which BEA reports as an increase of 0.3 percent, following the 0.2% increase in the PCE price index reported for March...applying that April inflation adjustment to the nominal changes in PCE left real PCE statistically unchanged in April, after the March real PCE increase was revised to an increase of 0.9%...note 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 those familiar chained 2012 dollars, which are the means that the BEA uses to compare the goods and services produced in one month or one quarter to the real goods and services produced in another....that result is shown in table 7 of the PDF, where we see that April's chained dollar consumption total works out to 13,145.6 billion annually, 0.02814% less than March's 13,149.3 billion, a decrease that the BEA reports as "less than 0.1%"...

However, to estimate the impact of the change in PCE on the change in GDP, that month over month change doesn't help us much, since GDP is computed & reported quarterly... thus we have to compare April's real PCE to the the real PCE of all 3 months of the first quarter....while this release reports 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 13,075.1 billion in chained 2012  dollars..(note that's the same as is shown in table 3 of the pdf for the 1st quarter GDP report)....when we compare April's adjusted PCE of 13,145.6 billion to the 1st quarter real PCE of 13,075.1  billion on an annual basis, we find that April real PCE has grown at a 2.174% annual rate compared to that of the 1st quarter....this means that even if April real PCE does not appreciate during May and June, growth in PCE would still add 1.50 percentage points to the growth rate of the 2nd quarter...

 

(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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