Sunday, August 2, 2020

2nd quarter GDP and annual revision; June’s income and outlays & June's durable goods

The key economic release of the past week was the 1st, or advance estimate of 2nd quarter GDP from the Bureau of Economic Analysis, which was accompanied by an annual revision to national accounts data over the prior five years...this week also the June report on Personal Income and Spending from the BEA, which also saw an annual revision before being incorporated into the GDP report, and the June advance report on durable goods...the major privately issued report released this week was the Case-Shiller house price indexes for May from S&P Case-Shiller, who reported that their national home price index was 4.5% higher than in the same month's report a year ago...

This week also saw the release of the last two regional Fed manufacturing surveys for July: the Dallas Fed's Texas Manufacturing Outlook Survey, which also covers adjacent western Louisiana and southeastern New Mexico, indicated its general business activity index rose to -3.0 in July, up from -6.1 in June, and up from -49.2 in May, indicating a moderation of the depression in the 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 from 0 in June to +10 in  July, its first positive reading since March. and suggesting a nascent recovery of that region's manufacturing...

2nd Quarter GDP Down a Record 32.9% After Revisions From 2015 to Present

The Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis released on Thursday included an annual revision over the past 5 years of GDP releases, revising previously published data from the first quarter of 2015 through the first quarter of 2020, which on net indicated that economic growth over the period from 2014 to 2019 was at a 2.3% annual rate, the same net growth over that period that was previously published....however, that was as the 5 year annual growth rate of personal consumption was revised down from 2.8% to 2.7%, the 5 year annual growth rate of private investment was revised up from 2.2% to 2.5%, the annual growth rate of exports was revised from 1.1% to 1.3%, the annual growth rate of imports was revised from 2.6% to 2.5%, and the growth of government investment and consumption was revised to a 1.9% rate from the 1.8% rate that had been indicated by GDP reports prior to this revision...

This report also showed that the GDP growth rate for 2015 was revised from the previously reported 2.9% to 3.1%; that the growth rate for 2016 was revised from the previously reported 1.6% to 1.7%, that the GDP growth rate for 2017 was revised from the previously reported 2.4% to 2.3%, that the growth rate of 2018 was revised from the previously reported 2.9% to 3.0%, and that the growth rate for 2019 was revised from the previously reported 2.3% to 2.2%...in addition, there was considerable revision to the growth rates on a quarter to quarter basis; for instance, for 2019, the growth rate of the 1st quarter was revised from the previously reported 3.1% rate to a 2.9% rate, the growth rate of the 2nd quarter was revised from the previously reported 2.0% rate to a 1.5% rate, the growth rate of the 3rd quarter was revised from the previously reported 2.1% rate to a 2.6% rate, and the growth rate of the 4th quarter of 2019 was revised from the previously reported 2.1% rate to a 2.4% rate...

The growth rate of first quarter of 2020, which had been reported at minus 5.0% when we reviewed it a month ago, remained at the same rate as previously published, as downward revisions to personal consumption, net exports, and private inventory investment were offset by upward revisions to fixed private investment and federal government spending and to state and local government spending...the first quarter change in personal consumption was revised from minus 6.8% to minus 6.9%, the first quarter change in private investment was revised from minus 10.2% to minus 9.0%, the first quarter change in exports was revised from a minus 9.0% rate to a minus 9.5% rate, the first quarter change in imports was revised from a minus 15.7% rate to a minus 15.0% rate, the first quarter growth rate of the federal government was revised to +1.6% from +1.1%, while the growth rate of state and local governments was revised from +0.5% to +1.1%....first quarter contraction rate of current dollar spending was revised from a 3.47% rate to a 3.38% rate, while the GDP deflator for the first quarter was revised from +1.3% to +1.4%...

All those revisions should leave you with the sense to take this initial advance estimate of 2nd quarter growth, which was released on Thursday with some of June's data still not reported, with a grain of salt...the BEA cautions that the 2nd quarter source data is incomplete and also subject to revisions, which have historically averaged +/-0.6% in either direction from the advance to the third estimate, and +/- 1.2% from the advance estimate to the final reading...note that June construction and non-durables inventory data have yet to be reported, and that information on the assumptions used for those reports and unavailable source data for this advance estimate is explained in a technical note that is posted with the news release, and references an Excel file with key source data and assumptions...

The Advance Estimate of 2nd Quarter GDP indicated that the real output of goods and services produced in the US shrank at a record 32.9% annual rate from the output level of the 1st quarter of this year, which we have just seen already shrunk at a 5.0% rate from the end of 2019...the contraction in 2nd quarter growth was due to greater shrinkage of personal spending, fixed investment, inventories, and exports, which was partially offset by an increase in federal government outlays and the shrinkage of imports, which is a positive for GDP...In current dollars, our second quarter GDP shrunk at a 34.34% annual rate, decreasing from what would work out to be a $21,561.1 billion a year rate in the 1st quarter to a $19,408.8 billion annual rate in the 2nd quarter, with the headline 32.9% annualized rate of decrease in real output arrived at after annualized GDP inflation adjustments averaging minus 1.8% were computed and applied to the current dollar change of the components, which we hope to illustrate below...

While we cover the details on the 2nd quarter, remember that the GDP news release reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change a bit more than 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 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 pdf for the 1st estimate of 2nd quarter GDP, which we find linked to on the BEA's GDP page, which also 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 since 2017 and quarterly since the 3rd quarter of 2016, 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...

Personal consumption expenditures (PCE), which normally accounts for roughly 70% of GDP, shrunk at a 35.8% rate in current dollars in the 2nd quarter, down from the first quarter’s spending drop at a revised 6.6% rate, but once the inflation adjustments were made with the PCE price indices for each quarter, real PCE shrunk at a 34.6% rate in the 2nd quarter after shrinking at 6.9% rate in the first...consumer spending for durable goods shrunk at a 5.8% rate on lower spending for furniture and durables other than motor vehicles and recreational goods and vehicles, but since the weighted prices for those durable goods fell at a 4.5% rate, the real output of durable goods represented by that spending only decreased at a 1.4% rate...at the same time, current dollar consumer spending for non durable goods fell at 21.6% rate, but the PCE price index for non-durable goods fell by 6.9%, meaning the real contraction in consumption of non durable goods was at a 15.9% rate...meanwhile, the annualized 43.4% current dollar drop in personal spending for services was further reduced by a 0.2% PCE services deflator to show the real 2nd quarter contraction in services was at a 43.5% rate...thus, with contraction in all components of personal consumption expenditures, the real decrease in output of consumer durable goods subtraced 0.04 percentage points from the change in GDP, the real drop in non-durable goods output for consumers subtraced 2.16 percentage points from 2nd quarter GDP growth, and the real drop in services provided to consumers subtraced 22.93 percentage points from the change in 2nd quarter GDP...

Just as personal consumption expenditures are adjusted for inflation using the PCE price indices to arrive at real PCE, the other current dollar components of GDP are also adjusted for inflation with the price indexes shown in table 4 of the GDP pdf to yield the real change in the output of goods or services.....hence, real gross private domestic investment, which had contracted at a 9.0% annual rate in the 1st quarter as investment in inventories tanked, shrank at a 49.0% annual rate in the 2nd quarter, as both fixed investment and inventory growth contracted...real non residential fixed investment shrank at a 27.0% annual rate as real investment in non-residential structures fell at a 34.9% rate, real investment in equipment fell at a 37.7% rate, and investment in intellectual property fell at 7.2% rate...hence, investment in real non residential fixed investment subtracted 3.62 percentage points from the growth in 2nd quarter GDP as real investment in non-residential structures subtracted 1.16 percentage points, real investment in equipment subtracted 2.13 percentage points from the change in GDP, and investment in intellectual property subtracted 0.33 percentage points from the change in GDP....in addition, residential investment fell at a 38.7% rate and subtracted 1.78 percentage points from the 2nd quarter's GDP, leaving the total fixed investment contribution at minus 5.38 percentage points...for an easy to read table as to what's included in each of those investment categories, see the NIPA Handbook, Chapter 6, page 3...

Meanwhile, further shrinkage of inventories also reduced gross investment and hence GDP, as real private inventories fell by an inflation adjusted $315.5 billion in the quarter, down from the revised $80.9 billion of inflation adjusted inventory shrinkage now reported for the first quarter, and as a result the $234.6 billion reduction in real inventory growth subtracted 3.98 percentage points from the 2nd quarter's growth rate, after an inflation adjusted $79.9 billion decrease in inventory growth in the 1st quarter had subtracted 1.34 percentage points from that quarter's GDP growth rate...however, smaller inventories indicate that less of the goods produced during the quarter were left "sitting on the shelf”, so their quarter over quarter decrease by $234.6 billion meant that real final sales of GDP were relatively greater by that much, and hence real final sales of GDP fell at a 29.3% rate in the 2nd quarter, after real final sales had decreased at a 3.4% rate in the 1st quarter, when the smaller decrease in inventories had a smaller impact on real final sales of GDP…

After adjustment for much lower export and import prices, both real exports and real imports decreased in the 2nd quarter, but imports fell by more...our real exports of goods and services decreased at a 64.1% rate in the second quarter, after decreasing at a 9.5% rate in the 1st quarter, while our real imports fell at a 53.4% rate in the 2nd quarter after falling at a 15.0% rate in the 1st quarter...as you'll recall, increases in 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 in GDP elsewhere), 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 here....thus the 2nd quarter decrease in real exports subtracted 9.38 percentage points from 2nd quarter GDP, after lower exports had subtracted 1.12 percentage points from first quarter GDP...at the same time, since imports subtract from GDP, their decrease at a 53.4% rate conversely added 10.06 percentage points to 2nd quarter GDP, after the decrease in first quarter imports had added 2.25 percentage points to that quarter's growth...as a result, our improving trade balance added a rounded total of 0.68 percentage points to 2nd quarter GDP growth, after an improved trade deficit had added 1.13 percentage points to GDP growth in the first quarter..

Finally, real consumption and investment by branches of government rose at a 2.7% annual rate in the 2nd quarter, after increasing at a 1.3% rate in the first quarter, as federal government consumption and investment grew at a 17.4% rate while state and local consumption and investment shrunk at a 5.6% rate...inflation adjusted federal spending for defense rose at a 4.1% rate and that added 0.08 percentage points to 2nd quarter GDP growth, while real non-defense federal consumption and investment grew at a 39.7% rate and added 1.03 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, state and local government investment and consumption expenditures, which fell at a 5.6% annual rate, subtracted 0.40 percentage points from the quarter's growth rate, as a decrease in real state and local investment at a 2.4% rate accounted for 10% of the decrease...

June Personal Income Down 1.1%, Personal Spending Up 5.6%; PCE Price Index Up 0.4%

Like the GDP report, the June Income and Outlays report also went through annual revision, with revisions from January 2015 through May 2020 for all of the metrics it reports, including personal consumption expenditures (PCE), the personal income and disposable personal income data, our savings and savings rate, and the PCE price index, the inflation gauge the Fed targets....A summary of those revisions is provided in this month's press release...since all the revisions made to personal consumption expenditures had already been incorporated into the GDP revisions that we have just reviewed, today we'll only consider those revisions from recent months that are relevant to putting the June change in perspective...

Also like the GDP report, all the dollar values reported in this release are seasonally adjusted and at an annual rate, ie, they tell us what income, spending and saving would be for an entire year if June's adjusted income and spending were extrapolated over a whole year...however, the percentage changes are computed monthly, from one 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 May to June....thus, when the opening line of the news release for this report tell us "Personal income decreased $222.8 billion (1.1 percent) in June..", they mean that the annualized figure for all types of personal income in June, $19,880.3 billion, was $83.6 billion, or roughly 1.1% less than the $20,103.1 billion annualized personal income figure for May; the actual increase in personal income in June over May is not given....similarly, disposable personal income, which is income after taxes, decreased by more than 1.4%, from an annual rate of $17,993.7 billion in May to an annual rate of $17,738.4 billion in June...the components of the June change in personal income and disposable personal income can be viewed in table 1 of the Full Release & Tables (pdf) for this release, also as annualized amounts, and were led by a $484.4 billion or 8.9% decrease to $4,947.1 billion annually in personal transfer receipts from government programs, which was partly offset by a $197.6 billion or 2.2% increase to $9,057.3 billion annualized wages and salaries….note that with the annual revision, the annualized figure for May personal income was revised from $19,839.3 billion up to $20,103. billion, and disposable personal income was revised from the originally reported $17,787.5 billion annually to $17,993.7 billion...

Meanwhile, seasonally adjusted personal consumption expenditures (PCE) for June, which were included in the change in real PCE in 2nd quarter GDP, rose at a $737.7 billion annual rate to an annual rate of $13,851.2 billion in consumer spending, an increase of 5.6% from May's PCE, which itself was revised from the previously reported annual rate of $13,162.6 billion to $13,113.5 billion....total personal outlays for June, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $734.4 billion to $14,367.6 billion, which left personal savings, which is disposable personal income less total outlays, at a $3,370.8 billion annual rate in June, down from the revised $4,360.5 billion in personal savings in May...as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, was at 19.0% in June, down from 24.2% in May, which was previously published at 23.2%.....

While our personal consumption expenditures accounted for 68.6% of our second quarter GDP, before those expenditures were included in the national measurement of the change in our output they were first 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 this report, which is a chained price index based on 2012 prices = 100....from Table 9 in the pdf for the June release, we find that the PCE index rose from 110.264 in May to 110.673 in June, giving us a month over month inflation rate of 0.37093%, which BEA reports as an increase of +0.4%, even as the full decimal fraction is used in all their computations....at the same time, Table 11 gives us a year over year PCE price index rounded to an increase of 0.8%, and a core price increase, excluding food and energy, of 0.9% for the past year, both well below the Fed's inflation target....applying the June inflation adjustment to the change in June PCE shows that real PCE was up 5.235% in June, which BEA reports as a 5.2% change in their rounded tables...note that when those PCE price indexes are applied to a given month's annualized current dollar PCE, it yields that month's annualized real PCE in chained 2012 dollars, which aren't really dollar amounts at all, but merely the means that the BEA uses to compare one month's or one quarter's real goods and services produced to another’s....those results are shown in tables 7 and 8 of the PDF, where you'll see the quarterly figures given are identical to those shown in table 3 of the GDP report, and which were used to compute the contribution of real personal consumption of goods and services to GDP.. 

June Durable Goods: New Orders Up 7.3%, Shipments Up 14.9%, Inventories Up 0.1%

The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for June (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods increased by $14.0 billion or by 7.3 percent to $206.9 billion, following a revised jump of 15.1% to $192.9 billion in May's new orders, which had originally been reported as a 15.8% increase to $194.4 billion...however, year to date new orders are still down 13.3% from those of 2019, not much change from the 13.6% year over year decrease we saw in this report last month, as the collapse of new orders in March and April means we've barely rebounded...as is usually the case, the volatile monthly change in new orders for transportation equipment led this month's headline change, as those transportation equipment orders rose $9.2 billion or 20.0 percent to $55.3 billion, on a 85.7% increase to $52,783 million in new orders for motor vehicles and parts....excluding new orders for transportation equipment, other new orders were still up 3.3% in June, as the important new orders for nondefense capital goods excluding aircraft, a proxy for future equipment investment, were also up 3.3% to $64,339 million...

The seasonally adjusted value of June's shipments of durable goods, which were inputs into various components of 2nd quarter GDP after their nominal value was adjusted for price changes, increased by $29.4 billion or 14.9 percent to $227.1 billion, after the value of May shipments were revised from a 4.4% increase to $198.5 billion to a 4.2% increase to $192.86 billion....a $24.2 billion or 51.9 percent increase to $70.9 billion in shipments of transportation equipment was the major contributor, as the value of shipments of motor vehicles rose 83.1% to $52,008 million and the value of shipments of commercial aircraft rose 18.5% to $4,190 million...excluding that volatile sector, the value of other shipments of durable goods rose 3.4%, as shipments of nondefense capital goods excluding aircraft were up 3.4% to $64,186 million, an increase that was already reflected in the 2nd quarter GDP equipment investment figures....

At the same time, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the fourth consecutive month, increasing by $0.4 billion or 0.1 percent to $425.3 billion, after the value of May's inventories was revised from $425.1 billion to $424.9 billion, still an increase from April but now statistically unchanged...an increase in inventories of transportation equipment was the reason for the June inventory decrease, as they rose $2.2 billion or 1.5 percent to $146.5 billion, on a 2.4% increase in inventories of nondefense aircraft and parts...

Finally, unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but volatile new orders, fell for the 3rd time in four months, decreasing by $15.4 billion or 1.4 percent to $1,092.4 billion, following a statistically insignificant May increase to $1,107.84 billion, which was revised from the 0.1% increase to $1,108.6 billion reported last month... a $15.6 billion or 2.1 percent to $743.5 billion in unfilled orders for transportation equipment was responsible for the June decrease, as unfilled orders excluding transportation equipment saw a statistically insignificant increase to $348,925 million....compared to a year earlier, the unfilled order book for durable goods is now 4.8% below the level of last June, with unfilled orders for transportation equipment 6.8% below their year ago level, reflecting the impact of a 12.2% decrease in the backlog of orders for commercial aircraft... 

 

(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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