Written by rjs, MarketWatch 666
1st Quarter GDP Revision, May’s Reports on Personal Income and Outlays, Durable Goods, and New Home Sales
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 2 months of data on personal consumption expenditures and hence accounts for 46% of 2nd quarter GDP.
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Other widely watched releases included the May advance report on durable goods and the May report on new home sales, both from the Census bureau, and the Case-Shiller house price indexes for April from S&P Case-Shiller, wherein their national home price index was reported as 6.4% higher than in the same month’s report a year ago…this week also saw the release of the Chicago Fed National Activity Index (CFNAI) for May, a weighted composite index of 85 different economic metrics, which fell from a upwardly revised +0.42 in April to -0.15 in May; that left the 3 month average of the index at +0.18, indicating national economic activity has been slightly above the historical trend over these recent months.
In addition, this week also saw the results of the last three Fed manufacturing surveys for June; the Texas area manufacturing survey from the Dallas Fed reported its broadest general business activity index rose from +26.8 in May to +36.5 in June, indicating that Texas manufacturing activity is now expanding at an even more robust pace, 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 +16 in May to +20 in June, indicating a bit of a pickup in the growth rate of that region’s manufacturing, and the Kansas City Fed manufacturing survey for June, covering western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, which reported its broadest composite index slipped to +28 in June from +29 in May, still indicating a strong expansion among that region’s manufacturers.
See also:
- June 2018 Texas Manufacturing Survey Declines
- June 2018 Kansas City Fed Manufacturing Near Highest Level in Survey History For the Third Month
- Richmond Fed Manufacturing Survey Improves In June 2018
- June 2018 Chicago Purchasing Managers Barometer At Five-Month High
- May 2018 Philly Fed Coincident Index Year-over-Year Rate of Growth Modestly Improved
- May 2018 CFNAI Super Index Moving Average Slows
1st Quarter GDP Revised to Show Growth at a 2.0% Rate as GDP Deflator is Revised Higher on Lower Import Prices
the Third Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that the real output of our goods and services increased at a 2.0% annual rate in the quarter, revised from the 2.2% growth rate reported in the second estimate last month, as the GDP deflator was revised from 1.9% to 2.2%….in current dollars, our first quarter GDP grew at a 4.24% annual rate, actually a bit higher than the 4.2% current dollar growth shown in the 2nd estimate, increasing from what would work out to be a $19,754.1 billion a year output rate in the 4th quarter of last year to a $19,960.1 billion annual rate in the 1st quarter of this year, with the headline 2.0% annualized rate of increase in real output arrived at after that annualized GDP inflation adjustment averaging 2.2%, revised from 1.9%, was applied to the current dollar change…
Recall 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 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 2009, and then that all percentage changes in this report are calculated from those 2009 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 third estimate of 1st quarter GDP, which is linked to on the sidebar of the BEA press release…specifically, we cite the data from table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 2nd quarter of 2014, from 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, table 4, which shows the change in the price indexes for each of the components, and table 5, which shows the quantity indexes for each of the components, which are used to convert current dollar figures into units of output represented by chained dollar amounts….the full pdf for the 1st quarter 2nd estimate, which this estimate revises, is here…
Real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 0.9% annual rate in the 1st quarter, down from the 1.0% growth rate reported last month…that PCE growth figure was arrived at by deflating the 3.4% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated consumer price inflation grew at a 2.5% annual rate in the 1st quarter, which was revised from the 2.6% PCE inflation rate published a month ago….real consumption of durable goods fell at a 2.1% annual rate, which was revised from the 2.6% rate of decrease shown in the second estimate, and subtracted 0.16 percentage points from GDP, as a drop in consumption of automobiles & parts at a 12.4% rate more than offset an increase in real consumption of recreational goods and vehicles and other durable goods…real consumption of nondurable goods by individuals rose at a 0.5% annual rate, revised from the 0.4% increase reported in the 2nd estimate, and added 0.07 percentage points to 1st quarter growth, as increases in real consumption of food and other non-durables offset decreases in real consumption of clothing and energy goods ….meanwhile real consumption of services rose at a 1.5% annual rate, revised from the 1.8% rate reported last month, and added 0.69 percentage points to the final GDP tally, as relatively sluggish growth in consumption of housing and utilities and health care offset stronger growth in other services….
Meanwhile, seasonally adjusted real gross private domestic investment grew at a 7.5% annual rate in the 1st quarter, revised from the 7.2% growth estimate reported last month, as real private fixed investment grew at a 7.6% rate, rather than at the 6.5% rate reported in the second estimate, while inventory growth was somewhat less than previously estimated…real investment in non-residential structures was revised from growth at a 14.2% rate to growth at a 16.2% rate, while real investment in equipment was revised to show growth at a 5.8% rate, up from the 5.5% growth rate previously reported…at the same time, the quarter’s investment in intellectual property products was revised from growth at a 10.9% rate to growth at a 13.2% rate, while the contraction rate of residential investment was reduced, from being down at a 2.0% rate to down a 1.1% rate annually…after those revisions, the increase in investment in non-residential structures added 0.44 percentage points to the 1st quarter’s growth rate, the increase in investment in equipment added 0.33 percentage points to the quarter’s growth, greater investment in intellectual property added 0.51 percentage points, while contraction in residential investment subtracted 0.04 percentage points from the increase in 1st quarter GDP…
Meanwhile, the growth in real private inventories was revised from the $20.2 billion in inflation adjusted dollars reported last month to show inventory grew at an inflation adjusted $13.9 billion rate in the 1st quarter…this came after inventories had grown at an inflation adjusted $15.6 billion rate in the 4th quarter, and hence the $1.7 billion smaller real inventory growth than in the 4th quarter subtracted 0.01 percentage points from the 1st quarter’s growth rate, revised from the 0.13 percentage point addition to GDP due to the modest inventory growth shown in the second estimate….however, since slower growth in inventories ultimately indicates that less of the goods produced during the quarter were left “sitting on the shelf” or in a warehouse, that decrease by $1.7 billion meant that real final sales of GDP were actually greater than GDP by that small bit, and therefore the BEA found that real final sales of GDP rose at a 2.0% rate in the 1st quarter, statistically unrevised from the second estimate, when inventory growth had subtracted from final sales…
The previously reported increase in real exports was revised lower, while the increase in real imports was revised higher, and as a result our net trade was a small subtraction from GDP, rather than the addition to GDP that was previously reported…our real exports grew at a 3.6% rate, revised from the 4.2% rate in the 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 increase added 0.44 percentage points to the 1st quarter’s growth rate….meanwhile, the previously reported 2.8% increase in our real imports was revised to a 3.2% increase, largely due to a a revision of the imports deflator from 9.0% to 7.2%, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, that increase subtracted 0.48 percentage points from 1st quarter GDP….thus, our deteriorating trade balance subtracted a net 0.04 percentage points from 1st quarter GDP, rather than the 0.08% percentage point addition to GDP resulting from an improving foreign trade balance that was indicated by the second estimate..
Finally (almost), there were also revisions to real government consumption and investment in this 3rd estimate, as the entire government sector is now shown growing at a 1.3% rate, revised from the 1.1% growth rate for government indicated by the 2nd estimate….real federal government consumption and investment was seen to have grown at a 1.7% rate from the 4th quarter in this estimate, which was unrevised from the growth rate shown in the 2nd estimate, as real federal outlays for defense grew at a 1.8% rate and added 0.07 percentage points to 1st quarter GDP, and all other federal consumption and investment grew at a 1.6% rate and added 0.04 percentage points to GDP, all of which were unrevised…meanwhile, real state and local consumption and investment grew at a 1.0% rate in the quarter, revised from the 0.8% growth rate in the 2nd estimate, and added 0.11 percentage points to 1st quarter GDP, which was revised from the 0.08 addition 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…
Lastly, we should clarify what happened with the various inflation adjustments in this revision…as previously noted, the reason GDP was revised lower was that the overall GDP deflator was revised higher, from 1.9% to 2.2%, thus reducing real GDP from the nominal amounts by a greater amount…that happened as the PCE deflator, which should be most heavily weighted, was revised down from 2.6% to 2.5%, the gross investment deflator was revised down from 2.9% to 2.8%, the exports deflator was unchanged, the imports deflator was revised down from 9.0% to 7.2%, while the government deflator was revised up from 3.2% to 3.4%… so why was the GDP deflator revised higher when most of its components were revised lower? the large upward revision to GDP prices reflects a big downward revision to import prices, notably petroleum, based on newly updated International Transactions data…since oil prices were revised lower, that means we imported more of it for the same dollars…and since imports are a subtraction from GDP, any change in their price has an opposite effect on the GDP deflator…thus it was the large downward revision in the price of imported oil which caused the overall GDP inflation adjustment to rise, and hence caused reported GDP to fall, despite the slight upward revision to current dollar GDP.
See also:
- Third Estimate 1Q2018 GDP Decreased to 2.0%. Corporate Profits Up.
- First Quarter 2018 GDP Final Estimate Slips To 2.00%
May Personal Income up 0.4%, Spending up 0.2%; 2 Months PCE Would Add 1.63 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 more than 69% 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 same report also gives us monthly 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 are not the current monthly change; rather, they’re seasonally adjusted amounts at an annual rate, ie, they tell us how much income and spending would increase for a year if May’s 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 April to May….
Thus, when the opening line of the press release for this report tell us “Personal income increased $60.0 billion (0.4 percent) in May“, they mean that the annualized figure for seasonally adjusted personal income in May, $17,005.4 billion, was $60.0 billion, or somewhat less than 0.4% greater than the annualized personal income figure of $16,945.4 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 less than 0.4%, from an annual rate of an annual rate of $14,418.5 billion in April to an annual rate of $14,447.8 billion in May….the contributors to the increase 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 $26.1 billion increase to $8,688.8 billion annually wages and salaries and a $17.1 billion increase to $2,530.0 billion annually in interest and dividend income…
For the personal consumption expenditures (PCE) that we’re most interested in, BEA reports that they increased at a $27.8 billion annual rate, or by about 0.2 percent, as the annual rate of PCE rose from $13,892.9 billion in April to $13,920.7 in May; that happened as the April PCE figure was revised down from the originally reported $13,906.9 billion annually and March PCE was revised from $13,827.1 billion to $13,824.8 billion, revisions that were already captured by the 3rd estimate of 1st quarter GDP we reported on earlier….the current dollar increase in May spending resulted from a $19.8 billion annualized increase to an annualized $4,474.6 billion in spending for goods and a $8.1 billion increase to $4,474.6 billion in annualized spending for services….total personal outlays in May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $29.3 billion to $14,447.8 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $482.0 billion annual rate in May, up from the revised $448.0 billion annualized personal savings in April… as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 3.2% in May from April’s savings rate of 3.0%…
As you know, before 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….the BEA achieves that by computing a price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, and which is included in Table 9 in the pdf for this report…that index rose from 114.521 in April to 114.764 in May, a month over month inflation rate that’s statistically 0.2122%, which BEA reports as an increase of 0.2 percent, following the PCE price index increase of 0.2% they reported for April…applying that inflation adjustment to the nominal amounts of spending left reported growth in real PCE at 0.0% in May, after an April real PCE increase of 0.3%….but notice 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 2009 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….that result is shown in table 7 of the PDF, where we see that May’s chained dollar consumption total works out to 12,130.5 billion annually, 0.0115% less than April’s 12,131.9 billion, a difference that the BEA reports as 0.0%, even as the full 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 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 12,061.0 billion in chained 2009 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 2009 dollar figures for April and May, 12,131.9 billion and 12,130.5 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 12,131.2 billion to the 1st quarter real PCE of 12,061.0 billion, we find that 2nd quarter real PCE has grown at a 2.35% annual rate for the two months of the 2nd quarter we have data for a this point…(note the math to get that annual growth rate: (((12,130.5 +12,131.9) / 2 ) / 12,061.0) ^4 = 1.0234857)….that’s a pace that would add 1.63 percentage points to the growth rate of the 2nd quarter by itself, even if there is no improvement in June PCE from the April-May average.
See also:
May Durable Goods: New Orders Down 0.6%, Shipments Down 0.1%, Inventories Up 0.3%
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 fell by $1.4 billion or 0.6 percent to $248.8 billion in May, following a revised decrease of 1.0% to $250.2 billion in April’s new orders, which had originally been reported as a 1.7% decrease to $248.5 billion…however, year to date new orders are still running 9.9% higher than they were a year ago, despite the back to back decreases….as is usually the case, the volatile monthly change in new orders for transportation equipment led the May headline change, as those transportation equipment orders fell $0.9 billion or 1.0 percent to $86.1 billion, on a 4.2% decrease to $55,555 million in new orders for motor vehicles and parts and a 7.0% decrease to $14,807 million in new orders for commercial aircraft….excluding new orders for transportation equipment, other new orders still fell 0.3% in May, as the important new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, were down 0.2% to $67,865 million…
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, decreased by $0.2 billion or less than 0.1 percent to $246.9 billion, in their first decrease in 10 months…again, shipments of transportation equipment drove the change, as they fell $0.5 billion or 0.6 percent to $82.1 billion, as the value of shipments of motor vehicles fell 4.4% to $55,418 million…excluding that volatile sector, the value of other shipments of durable goods rose 0.2%, and are now 7.9% higher year to date than a year ago…. meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the 18th time in 19 months, increasing by $1.1 billion or 0.3 percent to $403.0 billion, after April inventories were revised from $401.7 billion to $401.861 billion, still a 0.3% increase from March…inventories of motor vehicles led the increase, rising $338 million or 0.9 percent to $35,989 million…
Finally, 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 sixth time in seven months, increasing by $5.9 billion or 0.5 percent to $1,160.6 billion, following a April increase of 0.6% to $1,154.6 billion, revised from the $1,153.4 billion reported a month ago…a $4.0 billion or 0.5% decrease to $800.3 billion in unfilled orders for transportation equipment was responsible for most of the increase, but unfilled orders excluding transportation equipment orders were also up 0.5% to $360,213 million….compared to a year earlier, the unfilled order book for durable goods is now 4.7% above the level of last May, with unfilled orders for transportation equipment 4.4% above their year ago level, on a 5.9% increase in the backlog of orders for motor vehicles and parts…
See also:
Durable Goods New Orders Slow in May 2018
New Homes Sales Reported Higher in May; Prices Lower
The Census report on New Residential Sales for May (pdf) estimated that new single family homes were selling at a seasonally adjusted pace of 689,000 homes annually during the month, which was 6.7 percent (±14.1 percent)* above the revised April rate of 646,000 new single family homes a year and 14.1 percent (±19.9 percent)* above the estimated annual rate that new homes were selling at in May of last year….the asterisks indicate that based on their small sampling, Census could not be certain whether May new home sales rose or fell from those of April or even from those in May a year ago, with the figures in parenthesis representing the 90% confidence range for reported data in this report, which has the largest margin of error and is subject to the largest revisions of any census construction series….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 April were revised from the annual rate of 662,000 reported last month to a 646,000 annual rate, March’s annualized home sale rate, initially reported at 694,000, was revised from last months downwardly revised figure of 672,000 to 671,000, while the annual rate of February’s sales, initially reported at an annual rate of 618,000 and revised from a revised annual rate of 667,000 to a rate of 659,000 last month, were further revised to a 663,000 annual rate with this report…
The annual rates of sales reported here are extrapolated from the estimates of canvassing Census field reps, which indicated that approximately 65,000 new single family homes sold in May, up from the 62,000 new homes that sold in April, but unchanged from the estimated 65,000 new homes that sold in March….the raw numbers from Census field agents further estimated that the median sales price of new houses sold in May was at $313,000, down from the median sales price of $318,500 in April, while the average May new home sales price was $368,500, down from a $394,600 average price in April, and down from the average home sales price of $378,400 in May a year ago….a seasonally adjusted estimate of 299,000 new single family houses remained for sale at the end of May, which represents a 5.2 month supply at the May sales rate, down from a 5.4 month supply in April….for more details and graphics on this report, see Bill McBride’s two posts on this month’s report, New Home Sales increase to 689,000 Annual Rate in May and A few Comments on May New Home Sales.
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