The key economic releases of the past week were the 1st, or advance estimate of 2nd quarter GDP andthe June report on Personal Income and Spending, both from the Bureau of Economic Analysis...other widely watched releases this week included the June advance report on durable goods and the June report on new home sales, both from the Census bureau... in addition, the week also saw the release of theChicago Fed National Activity Index (CFNAI) for June, a weighted composite index of 85 different economic metrics, which was unchanged from a downwardly revised -0.1 in May, in an index where any negative reading indicates economic activity has been below the historical trend...that slightly negative print left the 3 month average of the index at –0.04 in June, down from +0.09 in May, indicating national economic activity has averaged slightly below the historical trend over those recent months....meanwhile, 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 based on relative March, April and May home sales prices was 19.7% higher than the price index for the same three months of a year ago...
This week also saw the release of the last three 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 fell to -22.6 in July, down from -17.7 in June, and from -7.3 in May, indicating a larger majority of Texas businesses are experiencing a slowdown than in prior months; 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 -9 in June to 0 in July, indicating stagnation at June's level among that region's manufacturers; and the Kansas City Fed manufacturing survey for July, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, reported its broadest composite index rose to +13 in July, up from a reading of +12 in June but down from +23 in May, indicating a modest plurality of that region's manufacturers continued to experience growth in July...
Advance Estimate of 2nd Quarter GDP Indicates Economy Shrunk 0.9% on Weaker PCE Goods, Construction, & Inventories
Our economy shrunk at a 0.9% rate in the 2nd quarter, a second consecutive contraction, as greater personal consumption of services and an increase in exports were more than offset by lower personal consumption of goods, a decrease in fixed investment and weaker investment in inventories, which subtracted over 2 percent from GDP growth.....the Advance Estimate of 2nd Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US contracted at a 0.9% annual rate from the output of the 1st quarter, when our real output contracted at a 1.6% real rate....in current dollars, our second quarter GDP grew at a 7.85% annual rate, increasing from what would work out to be a $24,386.7 billion a year output rate in the 1st quarter of this year to a $24,851.8 billion annual rate in the 2nd quarter, with the headline 0.9% annualized rate of decrease in real output arrived at after an annualized inflation adjustment averaging 8.7%, aka the GDP deflator, was computed from the price changes of the GDP components and applied to their 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. Note that June construction, June trade in services, and non-durables inventory data have yet to be reported, and that the BEA assumed a $5.7 billion increase in exports of services, a $4.2 billion increase in imports of services, a $10.1 billion decrease in residential construction, a $1.3 billion decrease in non-residential construction, a $1.2 billion increase in public construction, and a $1.2 billion increase in nondurable manufacturing inventories for June before they estimated 2nd quarter output (see the Key source data and assumptions excel file that accompanies this report for more specific details)..
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 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 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 2018 and quarterly since Q3 of 2018, table 2, which shows the contribution of each of the components to the GDP figures 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...
Personal consumption expenditures (PCE), which now accounts for more than 70% of GDP, grew at a 8.16% rate in current dollars in the 2nd quarter, down from the first quarter’s personal spending increase at a revised 9.02% rate, but after inflation adjustments were made with annualized PCE price indices increases of 7.1% for both quarters, real PCE rose 1.0% rate in the 2nd quarter after rising at a 1.8% rate in the first. Consumer spending for durable goods shrunk at a 1.2% rate on lower spending for recreational goods, but since the PCE price index for those durable goods grew at a 1.4% rate, the real output of durable goods represented by that spending decreased at a 2.6% rate. At the same time, current dollar consumer spending for non durable goods grew at a 9.2% rate, but since the weighted price index for those non-durable goods rose at a 15.5% rate, the real contraction in consumption of non durable goods was at a 5.5% rate. Meanwhile, the 9.7% current dollar growth in personal spending for services was deflated by the 5.4% PCE services price index increase to show the 2nd quarter's real growth in services was at a 4.1% rate. Thus, after shrinkage in the goods components of personal consumption expenditures and growth in services, the real growth in services provided to consumers added 1.78 percentage points to the growth rate of 2nd quarter GDP, while the real decrease in the output of consumer durable goods subtracted 0.22 percentage points from the change in GDP, and the real drop in non-durable goods output for consumers subtracted 0.85 percentage points from 2nd quarter GDP growth...
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 grown at a 5.0% annual rate in the 1st quarter, shrunk at a 13.5% annual rate in the 2nd quarter, as both fixed investment and inventory growth contracted.. Real nonresidential fixed investment shrank at a 0.1% annual rate as real investment in non-residential structures fell at a 11.7% rate and real investment in equipment fell at a 2.7% rate, while real investment in intellectual property grew at 9.2% rate...hence, investment in real nonresidential fixed investment subtracted a net 0.01 percentage point from the growth in 2nd quarter GDP, as real investment in non-residential structures subtracted 0.32 percentage points, real investment in equipment subtracted 0.16 percentage points from the change in GDP, but investment in intellectual property added 0.47 percentage points to the change in GDP.. But at the same time, real residential investment fell at a 14.0% rate and subtracted 0.71 percentage points from the 2nd quarter's GDP, leaving the total fixed investment impact at minus 0.72 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, slower growth of real inventories reduced the net change in overall gross investment and hence GDP, as real private inventories grew by an inflation adjusted $81.6 billion in the 2nd quarter, after growing at an inflation adjusted $188.5 billion in the first quarter, and as a result the $106.9 billion reduction in real inventory growth subtracted 2.01 percentage points from the 2nd quarter's growth rate, after an inflation adjusted $4.7 billion decrease in inventory growth in the 1st quarter had subtracted 0.35 percentage points from that quarter's GDP growth rate. However, smaller growth of inventories indicate that less of the goods produced during the quarter were left in warehouses or sitting on a store shelf, so their quarter over quarter decrease at a $106.9 billion rate meant that real final sales of GDP were relatively greater by that much, and hence real final sales of GDP grew at a 1.1% rate in the 2nd quarter, after real final sales had decreased at a 1.2% rate in the 1st quarter, when the smaller decrease in inventories meant that real final sales of GDP were only modestly higher than GDP…
After adjustment for much higher export and import prices, both real exports and real imports still increased during the second quarter, but our exports increased by more. Our real exports of goods and services rose at a 18.0% rate in the second quarter, after falling at a 4.8% rate in the 1st quarter, while our real imports rose at a 3.1% rate in the 2nd quarter, after rising at a revised 18.9% 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 the GDP computation 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 increase in real exports added 1.92 percentage points to 2nd quarter GDP, after the first quarter decrease had subtracted 0.55 percentage points from first quarter GDP. On the other hand, since imports subtract from GDP, their increase at a 3.1% rate subtracted 0.49 percentage points from 2nd quarter GDP, after a much larger first quarter import increase had subtracted 2.69 percentage points from that quarter's growth. As a result, our improving trade balance added a total of 1.43 percentage points to the 2nd quarter's GDP growth, after our deteriorating first quarter trade deficit had subtracted a rounded 3.23 percentage points from GDP growth in that quarter..
Finally, real consumption and investment by the branches of government shrunk at a 1.9% annual rate in the 2nd quarter, after decreasing at a 2.9% rate in the first quarter, as federal government consumption and investment shrunk at a 3.2% rate while state and local consumption and investment shrunk at a 1.2% rate. Inflation adjusted federal spending for defense grew at 2.5% rate, after shrinking at a 9.9% rate in the first quarter, and that added 0.09 percentage points to 2nd quarter GDP growth, while real non-defense federal consumption and investment shrunk at a 10.5% rate, after shrinking at a 2.5% rate in the first quarter, and that subtracted 0.30 percentage points from 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 shrunk at a 1.2% annual rate in the 2nd quarter, subtracted 0.13 percentage points from the quarter's growth rate, as a decrease in real state and local investment at a 12.0% rate more than offset increased state and local consumption spending..
June Personal Income Up 0.6%, Personal Spending Up 1.1%; PCE Price Index Up 1.0%, Savings Rate at a 13 Year Low
Friday's release of the June Income and Outlays report from the Bureau of Economic Analysis was concurrent with the GDP release on Thursday, and all the PCE data in the first quarter GDP report we just reviewed actually originated with this report...and like that GDP report, all the dollar values reported here are seasonally adjusted and at an annual rate, ie, they tell us what personal income, spending and saving would be for a year if June's adjusted income and spending were extrapolated over an entire 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 phrase of the press release for this report tell us "Personal income increased $133.5 billion (0.6 percent) in June....", it means that the annualized figure for all types of personal income in June, $21,742.7 billion, was $133.5 billion, or statistically 0.6% more than the annualized personal income figure $21,609.2 billion for May; the actual increase in personal income from May to June is not given....similarly, disposable personal income, which is income after taxes, rose by almost 0.7%, from an annual rate of $18,483.9 billion in May to an annual rate of $18,604.3 billion in June...the monthly contributors to the change in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also annualized....the main contributors to the $133.5 billion annualized increase in personal income in June included a $52.2 billion annual rate of increase in income from wages and salaries, a $26.6 billion annualized increase in business & farm proprietors’ income, and an $19.1 billion annualized increase in interest and dividend income…
At the same time, seasonally adjusted personal consumption expenditures (PCE) for June, which were included in the change in real PCE in the 2nd quarter GDP report, rose at a $181.1 billion annual rate to an annual rate of $17,135.6 billion in consumer spending, an increase of 1.1% from May's PCE, which itself was revised from the previously reported annual rate of $16,956.6 billion to $16,954.5 billion....total personal outlays for June, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $158.8 billion to $17,659.8 billion, which left personal savings, which is disposable personal income less total outlays, at a $944.5 billion annual rate in June, down from the revised $ 1,010.5 billion in annualized personal savings in May...as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 5.1% in June, down from a revised 5.5% in May, and the lowest personal savings rate since late 2008...
While our personal consumption expenditures accounted for 68.4% of our nominal second quarter GDP, before those expenditures could be 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 was 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 122.026 in May to 123.187 in June, giving us a month over month inflation rate of 0.95144%, which BEA reports as an increase of +1.0%, 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 6.8%, and a core price increase, excluding food and energy, of 4.8% for over the past year, both well above the Fed's inflation target....applying the June inflation adjustment to the change in June PCE shows that real PCE was up 0.1156% in June, which the BEA reports as a 0.1% increase 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 this report’s PDF, where you'll see the quarterly figures given are identical to those shown in table 3 of the 2nd quarter GDP report, and which were used to compute the contribution of real personal consumption of goods and services to GDP..
June's Durable Goods: New Orders Rose 1.9%, Shipments rose 0.3%, Inventories Rose 0.4%
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 $5.0 billion or by 1.9 percent to $272.6 billion, following a revised increase of 0.8% to $267.6 billion in May's new orders, which had originally been reported as an 0.7% increase to $267.2 billion...with new orders for durable good now up 8 out the last nine months, year to date new orders are 11.1% higher than those of 2021, up from the year to date increase of 10.9% reported last month..
As is usually the case, the volatile monthly change in new orders for transportation equipment drove this month's headline change, as those transportation equipment orders rose $4.5 billion or 5.1 percent to $92.7 billion, on a 80.6% increase to $9,760 million in new orders for defense aircraft....excluding new orders for transportation equipment, other new orders were up just 0.3% in June, and excluding new orders for defense equipment, other orders were up 0.4%, while new orders for nondefense capital goods excluding aircraft, a proxy for future equipment investment, were up 0.5% to $73,878 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 $0.7 billion or 0.3 percent to $269.6 billion, after the value of May shipments increased 1.5% to $268.9 billion, revised from the 1.3% increase to $268.4 billion that was reported last month....a statistically insignificant decrease to $85.1 billion in shipments of transportation equipment was a limiting factor, as the value of shipments of commercial aircraft fell 6.8% to $10,109 million, even as the value of shipments of motor vehicles rose 1.4% to $59,521 million...excluding that volatile sector, the value of other shipments of durable goods rose 0.4%, led by a $0.4 billion or 1.4 percent increase to $29.0 billion in the value of computers and electronic products, while the value of shipments of nondefense capital goods excluding aircraft were up 0.7% to $73,391 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 seventeenth consecutive month, increasing by $1.8 billion or 0.4 percent to $484.8 billion, after the value of May's inventories was revised from $482.7 billion to $483.5 billion, still a 0.6% increase from April...a 0.1% increase in inventories of transportation equipment also limited the June inventory increase, due a 0.6% decrease in the value of inventories of motor vehicles and parts, while the value of inventories of machinery led the increase, rising $0.7 billion or 0.9 percent to $83.1 billion...
Finally, the value of unfilled orders for manufactured durable goods, which is probably a better measure of industry conditions than the widely watched but volatile new orders, rose for the twenty-second consecutive month, increasing by $7.9 billion or 0.7 percent to $1,117.6 billion, following a 0.3% increase to $1,109.7 billion in May, which was revised from the 0.3% increase to $1,109.8 billion reported last month... a $7.7 billion or 1.2 percent increase to $647.7billion in unfilled orders for transportation equipment drove the June increase, while the value of unfilled orders excluding transportation equipment increased just 0.1% to $469,879 million.... compared to a year earlier, the unfilled order book for durable goods is now 7.0% above the level of last June, with unfilled orders for transportation equipment 7.2% higher than their year ago level, largely reflecting an 11.1% increase in the backlog of orders for commercial aircraft and a 9.6% increase in the order book for motor vehicles..
New Home Sales Reported Lower on Much Lower Prices in June After March, April and May Sales Revised Lower
The Census report on New Residential Sales for June (pdf) estimated that new single family homes were selling at a seasonally adjusted rate of 590,000 homes annually during the month, the lowest sales rate since April 2020, and which was 8.1 percent (±15.0 percent)* below the revised May rate of 642,000 new single family home sales annually and 17.4 percent (±11.6 percent) below the estimated annual rate that new homes were selling at in May of last year....the asterisk indicates that based on their small sampling, Census could not be certain whether June new home sales rose or fell from those of May, 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, these initial new home sales reports are not very reliable and often see significant revisions...with this report; sales new single family homes in May were revised from the 696,000 annual rate reported last month to a 642,000 a year rate, and April's annualized home sale rate, initially reported at a 591,000 rate, were revised from last months upward revision of 629,000 back down to 604,000, while March's new home sales, initially reported at an annual rate of 763,000 and revised from a revised annual rate of 709,000 to an annual rate of to a 715,000 rate last month, were revised down to an annual rate of 707,000 with this report...
The annual rates of sales reported here are extrapolated from the estimates of canvassing Census field reps, which indicated that approximately 49,000 new single family homes sold in June, down from the 59,000 new homes that sold in May, the 54,000 new homes that sold in April, and the 68,000 new homes that sold in March....the raw numbers from Census field agents further led to an estimate that the median sales price of new houses sold in June was $402,400, down from the median sale price of $444,500 in May, but up from the median price of $374,700 in June of last year, while the average June new home sales price was at $456,800, down from the revised $514,000 average in May and down 19.8% from the record $569,300 average sales price in April, but still up from the average sales price of $431,900 in June a year ago....a seasonally adjusted estimate of 457,000 new single family houses remained for sale at the end of June, which represents a 9.3 month supply at the June sales rate, up from the 8.4 month supply in May, which was originally reported as a 7.7 month supply....for more details and graphics on this report, see Bill McBride's posts on it: New Home Sales Decrease Sharply to 590,000 Annual Rate in June andNew Home Sales Decrease Sharply, Record Months of Unsold Inventory Under Construction...
(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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