The key economic releases of the past week were the 3rd estimate of 1st quarter GDP from the Bureau of Economic Analysis and the May report on Personal Income and Spending, also from the BEA, which includes two months of 2nd quarter data on personal consumption expenditures and hence accounts for 46% of 2nd quarter GDP....the other widely watched agency releases included the May report on Construction Spending and the May advance report on durable goods, both from the Census bureau...
In addition, this week also saw the results of the last two regional Fed manufacturing surveys for June; 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 -19 in June from -9 in May, indicating a deepening contraction among the majority of that region's manufacturers, and the Dallas Fed's Texas Manufacturing Outlook Survey, which also covers adjacent western Louisiana and southeastern New Mexico, which reported its general business activity index fell to -17.7 in June from -7.3 in May, also indicating a significantly larger plurality of Texas businesses are experiencing a slowdown than a month ago...
Privately issued reports released this week included the light vehicle sales report for June from Wards Automotive, which is the source data for the BEA report and which estimated that vehicles sold at a 13.00 million seasonally adjusted annual rate in June, up from the 12.68 million annual rate in May, but down from the 15.36 million annual rate in June of 2021, the Case-Shiller home price indexes for April from S&P Case-Shiller, who reported that their national home price index was 20.4% higher than in the same month's report a year ago, down from the 20.6% year over year gain they reported for March, and the widely followed purchasing manager's survey from the Institute for Supply Management (ISM): the June Manufacturing Report On Business indicated that the manufacturing PMI (Purchasing Managers Index) fell to 53.0% in June, down from 56.1% in May, which means that a smaller plurality of manufacturing industry purchasing managers reported expansion in various facets of their business in June than a month earlier...
1st Quarter GDP Revised to Show Our Economy Shrunk at a 1.6% Rate
The Third Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that the real output of our goods and services decreased at a 1.6% annual rate in the quarter, revised from the 1.5% contraction rate reported in the second estimate last month, as downward revisions to personal consumption of durable goods and services more than offset upward revisions to fixed investment and inventories....in current dollars, our first quarter GDP grew at a 6.55% annual rate, increasing from what would work out to be a $24,002.8 billion a year output rate in the 4th quarter of last year to a $24,386.7 billion annual rate in the 1st quarter of this year, with the headline 1.6% annualized rate of decrease in real output arrived at after an annualized inflation adjustment averaging 8.2%, aka the GDP deflator, was computed from the price changes of the GDP components and applied to their current dollar change...since that inflation adjustment was revised from the 8.1% adjustment indicated in the second estimate, it would thus account for the revision to GDP by itself...
As we review this month's revisions, remember that the press release reports all quarter over quarter percentage changes at an annual rate, which means that they're expressed as a change usually 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 third 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 2018; table 2, which shows the contribution of each of the components to the GDP change for those quarters 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's 2nd estimate, which this estimate revises, is here...
Real personal consumption expenditures (PCE), the largest component of GDP, was revised from the 3.1% growth rate reported last month to indicate real PCE grew at a 1.8% rate with this estimate…that PCE growth figure represents the effect of deflating the 9.1% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated consumer inflation grew at a 7.1% annual rate in the 1st quarter, which was revised from the 7.0% PCE inflation rate published a month ago....real consumption of durable goods grew at a 5.9% annual rate, which was revised from the 6.8% growth rate shown in the 2nd estimate, and added 0.49 percentage points to GDP, as growth in real consumption of motor vehicles and parts at a 16.2% rate accounted for more than two-thirds of the quarter's growth in durable goods....on the other hand, real consumption of nondurable goods by individuals shrunk at a 3.7% annual rate, the same contraction rate that was reported in the 2nd estimate, and subtracted 0.56 percentage points from 1st quarter economic growth, as lower real consumption of gasoline and other energy goods accounted for 40% of the first quarter's nondurable goods pullback…..meanwhile, consumption of services was seen growing at a 3.0% annual rate, revised from the 4.8% growth rate reported last month, and added 1.31 percentage points to the final GDP tally, as growth of the output of nonprofit institutions serving households accounted for 20% of the first quarter's growth in services....
Meanwhile, seasonally adjusted real gross private domestic investment grew at a 5.0% annual rate in the 1st quarter, revised from the 0.5% growth rate estimate reported last month, as real private fixed investment grew at a 7.4% rate, revised from the 6.8% rate reported in the second estimate, while business and farm inventories grew by more than had been previously estimated...real investment in non-residential structures was revised from shrinking at a 3.6% rate to shrinking at a 0.9% rate, while real investment in equipment was revised to show growth at a 14.1% rate, revised from the 13.1% growth rate reported in the 2nd estimate...at the same time, the 1st quarter's investment in intellectual property products was revised from real growth at a 11.6% rate to real growth at a 11.2% rate, while growth in real residential investment remained at a 0.4% rate, same as reported a month ago…after those revisions, the contraction in investment in non-residential structures subtracted 0.02 percentage points from 1st quarter GDP, while the increase in investment in equipment added 0.73 percentage points to the quarter's growth, the increase in investment in intellectual property added 0.56 percentage points, and the increase in residential investment added 0.02 percentage points to the 1st quarter's growth rate...
At the same time, the 1stt quarter's growth of real private inventories was revised from the previously reported $149.6 billion in inflation adjusted dollars to show inventories grew at an inflation adjusted $188.5 billion rate...this came after inventories had grown at an inflation adjusted $193.2 billion in the 4th quarter, and hence the $4.7 billion negative change in real inventories from those of the 4th quarter subtracted 0.35 percentage points from the 1st quarter's growth rate, revised from the 1.09 percentage point subtraction due to lower inventory growth that was indicated by the second estimate....however, since growth in inventories indicates that more of the goods produced during the quarter would have been left in storage or "sitting on the shelf”, the $4.7 billion reduction in their growth conversely means real final sales of GDP were actually greater by that amount, and therefore the BEA found that real final sales of GDP fell at a 1.2% rate in the 1st quarter, revised from the 0.4% rate of decrease in real final sales shown in the second estimate...
The previously reported decrease in real exports was revised to a smaller decrease, while the increase in real imports was greater than previously reported, and with those changes offsetting one another, the impact of our net trade on GDP remained as was previously reported...our real exports of goods and services shrunk at a 4.8% rate in the 1st quarter, revised from the 5.4% contraction rate shown in second 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 decrease conversely subtracted 0.55 percentage points from the 1st quarter's growth rate, revised from the 0.62 percentage point subtraction due to lower exports shown last month...on the other hand, the previously reported 18.3% increase in our real imports was revised to a 18.9% increase, and since imports subtract from GDP because they represent either consumption or investment that is added to GDP with those figures but was not produced in the US, their increase subtracted 2.69 percentage points from 1st quarter GDP, revised from the 2.61 percentage point subtraction shown a month ago....thus, the deteriorating trade balance that has accompanied the increase in consumer spending subtracted a rounded 3.23 percentage points from 1st quarter GDP, same as the subtraction resulting from a worsening foreign trade balance that was indicated by the second estimate....
Finally, there were also modest revisions to real government consumption and investment in this 3rd estimate, as the entire government sector is now shown to be shrinking at a 2.9% rate, revised from the 2.7% contraction rate for government indicated by the the 2nd estimate....real federal government consumption and investment was seen to have shrunk at a 6.8% rate from that of the 4th quarter in this estimate, which was revised from the 6.1% contraction rate shown in the 1st estimate, as real federal outlays for defense shrunk at a 9.9% rate, revised from the 8.5% rate that was previously reported, and subtracted 0.39 percentage points from 1st quarter GDP, while real non-defense federal consumption and investment shrunk at a 2.5% rate, revised from the 2.6% rate previously reported, and subtracted 0.07 percentage points from GDP...at the same time, real state and local consumption and investment shrunk at a 0.5% rate in the quarter, revised from the 0.6% contraction shown in the 1st estimate, and subtracted 0.07 percentage points from 1st quarter GDP, which was unrevised from the subtraction shown in the second 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...
May's Personal Income Up 0.5%, Spending Up 0.2%, PCE Prices Up 0.6%; 2 Months PCE Would Add 0.85 Percentage Points to Q2 GDP
The May report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for roughly 70% of GDP, and 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....this report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate...since this report feeds in to GDP and other national accounts data, the changes reported for each of those metrics are seasonally adjusted amounts expressed at an annual rate....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 April to May....
Thus, when the opening line of the news release for this report tell us "Personal income increased $113.4 billion (0.5 percent) in May", that means that the annualized figure for seasonally adjusted personal income in May, $21,604.3 billion, was $113.4 billion, or more than 0.5% more than the annualized personal income figure of $21,490.9 billion for April; the actual, unadjusted change in personal income from April to May is not given...similarly, annualized disposable personal income, which is income after taxes, rose by more than 0.5%, from an annual rate of an annual rate of $18,384.7 billion in April to an annual rate of $18,481.2 billion in May.....the reasons for the annualized $113.4 billion increase in personal income can be viewed in the Full Release & Tables (PDF) for this release, also as annualized amounts, and primarily reflected a $60.5 billion increase in wages and salaries, a $26.2 billion increase in farm and small business proprietor's income, and a $15.7 billion increase in interest and dividend income...again, those are all annualized figures...
For the personal consumption expenditures (PCE) that are relevant to GDP, the BEA reports that they increased at a $32.7 billion annual rate, or by a little less than 0.2 percent, as the annual rate of PCE rose from $16,923.9 billion in April to $16,956.6 in May; that came after the April PCE figure was revised down from the originally reported $17,059.3 billion annually, and March PCE was revised from an annual rate of $16,907.0 billion to an annual rate of $16,831.2 billion, a revision that was already captured by the 3rd estimate of 1st quarter GDP we reported on earlier....the current dollar increase in May spending reflected a $76.2 billion or 0.7% increase to $11,119.8 billion in annualized spending for services, which was partly offset by a $43.5 billion or 0.7% decrease to an annualized $5,836.8 billion in spending for goods ....total personal outlays in May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $38.3 billion to a $17,475.0 billion annual rate, which left national personal savings, which is disposable personal income less total personal outlays, at a $1,006.2 billion annual rate in May, up from the revised $948.0 billion annualized personal savings in April...as a result of that decrease, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.4% in May, after April's savings rate was revised from 5.0% to 5.2% but remained the lowest personal savings rate since late 2008....
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 121.339 in April to 122.052 in May, a month over month inflation rate that's statistically 0.58761%, which BEA reports as an increase of 0.6 percent, following a similarly rounded PCE price index increase of 0.2% reported for April...applying that May inflation adjustment to the nominal amounts of spending for those months left the reported change in real PCE at -0.4% in May, after a real PCE increase of 0.3% in April and a real PCE increase of 0.3% in March....note that when those PCE price indexes are applied to each 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 one month's or one quarter's real goods and services produced to another....those results are shown in table 7 of the PDF, where we see that May's chained dollar consumption total works out to 13,895.5 billion annually, 0.39282% less than April's 13,950.3 billion, a difference that the BEA reports as - 0.4%, even as the full decimal fractions are used in all their computations...
However, to estimate the impact of the change in PCE on the change in GDP, such month over month changes don't help us much, since GDP is reported quarterly...thus we have to compare April and May's real PCE to the the real PCE of the 3 months of the first quarter....while this report shows PCE for each of those amounts on a monthly basis, 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 13,881.1 billion in chained 2012 dollars..(note that's the same as is shown in table 3 of the pdf for the revised 1st quarter GDP report)....then, by averaging the annualized chained 2012 dollar figures for April and May, 13,950.3 billion and 13,895.5 billion respectively, we can get an equivalent annualized PCE for the two months of the 2nd quarter that we have data for so far....when we compare that average of 13,922.9 billion to the 1st quarter real PCE 2012 dollar representation of 13,881.1 billion, we find that 2nd quarter real PCE has risen at a 1.21% annual rate for the two months of the 2nd quarter that we have data for at this point...(note the math used to get that annual growth rate: (((13,950.3 + 13,895.5 ) /2) / 13,881.1 ) ^ 4 = 1.0120997)....that's a pace that would add 0.85 percentage points to the growth rate of the 2nd quarter, with that computation based on the unlikely assumption that there'd be no change in June PCE from the April-May average...
Construction Spending Fell 0.1% in May after March & April Spending Were Revised Much Higher
The Census Bureau's report on construction spending for May (pdf) estimated that May's seasonally adjusted construction spending would work out to $1,779.8 billion annually if extrapolated over an entire year, which was 0.1 percent (±0.8 percent)* below the revised annualized estimate of $1,779.8 billion of construction spending in April, but 7.5 percent (±1.3 percent) above the estimated annualized level of construction spending in May of last year...with this release, unadjusted construction spending data was revised back to January 2020 and seasonally adjusted data was revised back to January 2015...as a result of that and the usual monthly revision, the April spending estimate was revised 2.0% higher, from $1,744.8 billion to $1,779.8 billion, while the annual rate of construction spending for March was revised 1.6% higher, from $1,744.8 billion to $1,548.555 billion...we would normally suggest that a large upward revision to annualized March construction spending would have large positive impact on first quarter GDP when the annual revisions to GDP are released in late July, but with 4th quarter construction also being revised, the entire quarter over quarter change will need to be recomputed, which we're not about to undertake at this time...after revisions, construction spending tor the first 5 months of 2022 now amounts to $686.9 billion, 11.0 percent (±1.0 percent) more than the $619.0 billion in construction spending for the same 5 months of 2021…
A further breakdown of the different subsets of May construction spending is provided in a Census summary, which precedes the detailed spreadsheets:
- Private Construction: Spending on private construction was at a seasonally adjusted annual rate of $1,436.0 billion, virtually unchanged (±0.7 percent)* from the revised April estimate of $1,435.9 billion. Residential construction was at a seasonally adjusted annual rate of $938.2 billion in May, 0.2 percent (±1.3 percent)* above the revised April estimate of $935.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $497.8 billion in May, 0.4 percent (±0.7 percent)* below the revised April estimate of $499.9 billion.
- Public Construction: In May, the estimated seasonally adjusted annual rate of public construction spending was $343.8 billion, 0.8 percent (±1.6 percent)* below the revised April estimate of $346.6 billion. Educational construction was at a seasonally adjusted annual rate of $78.4 billion, 0.4 percent (±3.0 percent)* below the revised April estimate of $78.7 billion. Highway construction was at a seasonally adjusted annual rate of $98.1 billion, 2.3 percent (±4.6 percent)* below the revised April estimate of $100.4 billion.
This construction spending report will be used as source data for 3 subcomponents of GDP; investment in private non-residential structures, investment in residential structures, and government investment outlays, for both state and local governments....however, gauging the impact of the revised April and May construction spending as reported here on 2nd quarter GDP is difficult because all figures given in this report are in nominal dollars and as you know, data used to compute the change in GDP must be adjusted for changes in price...accurately adjusting construction spending for price changes is no easy matter, either, because the National Income and Product Accounts Handbook, Chapter 6 (pdf), lists a multitude of privately published deflators that are used by the BEA for the various components of non-residential investment, ie, such as using the Engineering News Record construction cost index for utilities' construction....in lieu of trying to find and adjust for all of the obscure price indices the BEA uses, we've opted to just use the producer price index for final demand construction as an inexact shortcut to make an aggregate price adjustment sufficient to make an estimate...that index showed that aggregate construction costs rose 0.4% in May, after being up 3.7% from March to April, up 0.6% from February to March, and up 0.6% from January to February..
On that basis, we can estimate that May construction costs were roughly 4.1% greater than those of March, 4.7% greater than those of February and almost 5.4% greater than those of January, and obviously 0.4% more than those of April...we then use those percentages to inflate spending for each of the months of the first quarter which, for purposes of comparison, is arithmetically the same as deflating April and May construction spending vis-a vis the 1st quarter months....annualized construction spending in millions of dollars for the five months in question is given here as 1,779,800 for May, 1,782,458 for April, 1,768,168 for March, 1,753,123 for February, and 1,726,585 for January....thus to figure the annual rate of change of May's nominal construction spending figure of $1,779,800 and April's figure of $1,782,458 -from those of the 'inflation adjusted' figures of the first quarter, our calculation becomes (((1,779,800 + 1,782,458 * 1.004) / 2) / (((1,768,168 * 1.041) + (1,753,123 * 1.047) + (1,726,585 * 1.054)) / 3)) ^ 4 = 0.900642, which means that after adjusting for inflation, construction spending has been shrinking at a 9.94% annual rate over the first 2 months of the second quarter...put another way, that would be a construction spending contraction at a $47.31 billion annual rate, which means that if June construction shows no improvement, the 2nd quarter contraction in real construction would subtract a net of about 0.78 percentage points from 2nd quarter GDP across those components that it influences...
May’s Durable Goods: New Orders Up 0.7%, Shipments Up 1.3%, Inventories Up 0.6%
The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for May (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods rose by $1.9 billion or by 0.7 percent to $267.2 billion in May, following a revised increase of 0.4% to $265.3 billion in April’s new orders, albeit statistically unchanged from last month's report...with new durable good orders up seven out the last eight months, year to date new orders are now running 10.9% higher than they were a year ago....
As is usually the case, the volatile monthly change in the value of new orders for transportation equipment led the May headline increase, rising $0.7 billion or 0.8 percent to $87.6 billion, led by a 8.1% increase to $5,321 million in new orders for defense aircraft....excluding new orders for transportation equipment, other new orders rose 0.7% in May, as the value of new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, rose 0.5% to $73,458 million...
Meanwhile, the seasonally adjusted value of May's shipments of durable goods, which will ultimately be inputs into various components of 2nd quarter GDP after adjusting for changes in prices, rose for the twelfth time in thirteen months, increasing by $3.6 billion or 1.3 percent to $268.4 billion, after the value of April's shipments was revised from an increase of 0.1% to $264.3 billion to a 0.3% increase to $264.8 billion....shipments of transportation equipment led the May increase, rising $1.7 billion or 2.1 percent to $84.7 billion, on a 5.7% increase in the value of shipments of commercial aircraft....meanwhile the value of shipments of nondefense capital goods excluding aircraft rose 0.5% to $73,458 million, after rising a downwardly revised 0.3% in April…
At the same time, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the sixteenth consecutive month, increasing by $2.7 billion or 0.6 percent to $482.7 billion, after the value of end of April inventories were revised from $479.4 billion to $480.0 billion, now a 0.9% increase from March...a $1.0 billion or 1.2 percent to increase to $82.3 billion in the value of inventories of machinery led the inventory increase, while the value of inventories of transportation equipment rose $51 million, or less than 0.1%, to $156,909 million...
Finally, the value of unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but volatile new orders, rose for the twenty-first consecutive month, increasing by $3.7 billion or 0.3 percent to $1,109.8 billion, following an April increase of 0.5% to $1,106.1 billion, revised from the 0.5% increase to $1,106.7 billion reported a month ago...a $2.9 billion or 0.5 percent to increase to $639.8 billion in the value of unfilled orders for transportation equipment led to the increase, while the value of unfilled orders excluding transportation equipment orders were up 0.2% to $469,984 million.... compared to a year ago, the unfilled order book for durable goods is now 7.2% higher than the level of last May, with unfilled orders for transportation equipment 6.6% above their year ago level, led by an 11.3% increase 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 of which are picked from the aforementioned GGO posts, contact me…)
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