Written by rjs, MarketWatch 666
Q1 GDP; March incomes and outlays; and March construction spending
The key economic releases from the past week that we’ll review today are the advance estimate of 1st quarter GDP and the concurrent March report on Personal Income and Spending, both from the Bureau of Economic Analysis, and the March report on Construction Spending (pdf), which was released two days after the GDP estimate and hence revises it.
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This week also saw the release of the last two regional Fed manufacturing surveys for April: the Dallas Fed Texas Manufacturing Outlook Survey, covering Texas, western Louisiana and eastern New Mexico, reported their general business activity composite index fell to an all time low of -73.7 in April, down from -70.0 in March, indicating that the vast majority of Texas business are reporting contraction during April, 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 fell from a March reading of +2 to an all time low of -53, the largest one-month drop on record, indicating the sudden onset of depression like conditions among that region’s manufacturing firms..
Privately issued reports released this week included the light vehicle sales report for April from Wards Automotive, which estimated that vehicles sold at a 8.58 million annual rate in April, down from the 11.37 million annual sales rate in March, and down from the 16.43 million annual sales rate in April a year ago, and the February Case-Shiller Home Price Index from S&P Case-Shiller, which reported that the relative average of December, January and February home prices was 4.2% higher than average prices for the same homes that sold during the same 3 month period a year earlier, and the April Manufacturing Report On Business from the Institute for Supply Management (ISM), which reported that their manufacturing PMI (Purchasing Managers Index) fell to 41.5% in April, down from 49.1% in March, which suggests a deepening contraction among manufacturing firms nationally.
See also:
- April 2020 Texas Manufacturing Dives Deeper Into Contraction
- April 2020 Richmond Fed Manufacturing Survey Jumps Deep Into Contraction
- S and P CoreLogic Case-Shiller 20 City Home Price Index February 2020 Year-over-Year Growth Now 3.5%
- March 2020 Pending Home Sales Crash Due To Coronavirus
- April 2020 Chicago Purchasing Managers Barometer Drops Deeper In Contraction
- May 2020 Economic Forecast Now In Coronavirus Contraction
- 29 April 2020 FOMC Meeting Statement: The Fed Believes The Impacts Caused By Coronavirus Will Continue For A Long Time
1st Quarter GDP Shrunk at a 4.8% Rate on a Decrease in Personal Services
Our economy shrunk at a 4.8% rate in the 1st quarter, the first GDP reversal since the first quarter of 2014, as decreased consumption of goods and services, investment, exports and inventories were only partly offset by decreased imports, which added over 2 percent back to GDP…..the Advance Estimate of 1st Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US contracted at a 4.8% annual rate from the output of the 4th quarter of 2018, when our real output grew at a 2.1% real rate…in current dollars, our first quarter GDP fell at a 3.47% annual rate, decreasing from what would work out to be a $21,729.1 billion a year output rate in the 4th quarter of last year to a $21,537.9 billion annual rate in the 1st quarter of this year, with the headline 4.8% annualized rate of decrease in real output arrived at after an annualized inflation adjustment averaging 1.3%, aka the GDP deflator, was computed and applied to the 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….also note that March construction and non-durables inventory data hadn’t yet been reported at the time of the release, and that the BEA assumed a modest decrease in nonresidential construction, small increases in both residential and public construction, and a modest decrease in nondurable manufacturing inventories for March before they estimated 1st quarter output (see their Key source data and assumptions Excel file that accompanies this report for more specific details)..
While we cover the details on the 1st quarter below, remember that this release reports all quarter over quarter percentage changes at an annual rate, which means that they’re expressed as a change a bit over 4 times of that what actually occurred over the 3 month period, and that the prefix “real” is used to indicate that each change has been adjusted for inflation using price indexes chained from 2012 prices, 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 advance estimate of 1st quarter GDP, which we find on the BEA GDP landing page, where you can also find 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 and quarterly since the 2nd quarter of 2016, table 2, which shows the contribution of each of the components to the GDP growth figures for those quarters and years, table 3, which shows both the current dollar value and the inflation adjusted value in 2012 dollars of each of those components, and table 4, which shows the change in the price indexes for each of the GDP components….
Personal consumption expenditures (PCE), which accounts for nearly 70% of GDP, shrunk at a 6.3% rate in current dollars in the 1st quarter, which worked out to a real contraction rate of 7.6% in consumed goods and services after an annualized 1.3% PCE price index increase was used to adjust that personal spending for inflation….consumer outlays for durable goods fell at a 17.4% rate in current dollars while prices of those durable goods were on average 1.6% lower, and thus the BEA found real growth in output of consumer durables fell at a 16.1% rate, the largest real drop since the 4th quarter of 2008, as a drop in real consumption of automobiles at a 33.8% rate accounted for four-fifths of the durable goods decrease….however, the BEA found that real output of consumer non-durable goods grew at a 6.9% rate after a increase in consumer spending for non-durable goods at a 6.2% rate was adjusted for an average drop in non-durable prices at a 0.6% rate, as a 29.0% real increase in consumption of food and beverages at home more than offset real decreases in consumption of clothing and energy goods…meanwhile, the 8.1% nominal decrease in consumer outlays for services was adjusted with a 2.4% increase in prices for services to show that real output of consumer services shrunk at a 10.6% annual rate, as a 16.3% contraction of health care services accounted for 45% of the decrease in services….as a result of those changes in growth from the 4th to the 1st quarter, decreased consumption of services subtracted 4.99 percentage points from the growth rate of GDP, the decrease in outlays for durable goods subtracted 1.21 percentage points from GDP, largely on a 0.95 percentage point hit from automotives, while the increased consumption of non-durable goods added 0.94 percentage points to the growth rate of the 1st quarter economy..
The real change in other components of the change in GDP are computed by the BEA in the same manner as we have just illustrated for computing PCE; ie, the annualized change in current dollar spending for the quarter is adjusted with the annualized inflation factor for that component, yielding the change in real units of goods or services produced during the quarter at an annual rate….thus, after inflation adjustment, real gross private domestic investment, which had shrunk at a 6.0% annual rate in the 4th quarter of 2019, shrunk at a 5.6% annual rate from there in the 1st quarter…real growth in fixed investment contracted at a 2.6% annual rate in the 1st quarter, after shrinking at a 0.6% rate in the 4th quarter, as real non-residential fixed investment contracted at a 8.6% rate while real residential investment grew at a 21.0% rate…real investment in non-residential structures fell at a 9.7% rate and subtracted 0.28 percentage points from 1st quarter GDP, and real investment in equipment shrunk at a 15.2% rate and subtracted 0.91 percentage points from GDP, while real investment in intellectual property grew at 0.4% rate and added 0.02 percentage points to GDP, and growing real residential investment added 0.74 percentage points to the quarter’s growth rate….for an easy to read table as to what’s included in each of those GDP investment categories, see the NIPA Handbook, Chapter 6, page 3…
A contraction of real inventories also reduced gross investment and hence GDP, as real private inventories shrunk by an inflation adjusted $16.2 billion in the quarter, after growing at an inflation adjusted $13.1 billion in the 4th quarter, and as a result the $29.4 billion negative change in real inventory growth subtracted 0.53 percentage points from the 1st quarter’s growth rate, after a $54.6 billion decrease in real inventory growth in the 4th quarter had subtracted 0.98 percentage points from that quarter’s GDP….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 $29.4 billion reversal of their growth conversely means real final sales of GDP were actually greater by that amount, and hence real final sales of GDP shrunk at a 4.3% rate in the 1st quarter, down from the real final sales growth rate of 3.2% in the 4th quarter, when the greater decrease in inventory growth meant that the quarter’s growth in real final sales was that much greater than that of the quarter’s GDP…
Meanwhile, our real exports of goods and services shrunk at a 8.7% rate in the 1st quarter, after growing at a 2.1% rate in the 4th quarter of 2019, while our real imports shrunk at a 15.3% rate in the 1st quarter, after shrinking at a 8.4% rate in the 4th quarter…as you’ll recall, real increases in exports add 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 figures elsewhere), so that decrease in 1st quarter exports subtracted 1.02 percentage points from 1st quarter GDP….on the other hand, real increases in imports subtract from GDP because they are either consumption or investment that was added to another GDP component that shouldn’t have been, because it was not produced in our country and not part of our national product…conversely, a decrease in imports would mean that more of the quarter’s consumption or investment was produced domestically, and hence adds to GDP growth….thus, the 15.3% decrease in real imports in the 1st quarter added 2.32 percentage points to GDP and as a result, our improving trade balance added a net 1.30 percentage points to 1st quarter GDP, after a decrease in our trade deficit had added 1.51 percentage points to GDP in the fourth quarter of last year…
Finally, real consumption and investment by all branches of government grew at a 0.7% annual rate in the 1st quarter, after increasing at a 2.5% rate in the 4th quarter, as federal government consumption and investment grew at a 1.7% annual rate, while state and local consumption and investment grew at a 0.1% rate….at the federal level, inflation adjusted spending for defense grew at a 0.8% rate and added 0.03 percentage points to 1st quarter GDP growth, while real non-defense federal consumption and investment grew at a 3.1% rate and added 0.08 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 goods or services….meanwhile, state and local government investment and consumption expenditures grew at an 0.1% annual rate and added a rounded 0.02 percentage points to the quarter’s growth rate, as real state and local investment grew at an 4.7% rate added 0.09 percentage points of that to the quarter’s growth rate.
See also:
- Advance Estimate 1Q2020 GDP Quarter-over-Quarter Growth Now In Contraction Due To The Coronavirus
- A Wider Societal Divide May Be Opening In The U.S.
March Personal Income Fell 2.0%, Personal Spending Fell 7.5% , PCE Price Index Fell 0.3%
Thursday’s release of the March Income and Outlays report from the Bureau of Economic Analysis was concurrent with the GDP release on Wednesday, and all the PCE data in the 1st quarter GDP report we just covered 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 income, spending and saving would be for a year if March’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 February to March….thus, when the opening line of the press release for this report tell us “Personal income decreased $382.1 billion (2.0 percent) in March…“, it means that the annualized figure for all types of personal income in March, $18,696.3 billion, was $382.1 billion, or a bit more than 2.0% less than the annualized personal income figure for February; the actual decrease in personal income in March from February is not given….similarly, disposable personal income, which is income after taxes, also fell by more than 2.0%, from an annual rate of $16,842.8 billion in February to an annual rate of $16,508.2 billion in March…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…in March, the largest contributors to the $382.1 billion annual decrease rate of increase in personal income were a $296.1 billion decrease in wages and salaries and a $145.2 billion decrease in proprietor’s income, while income from personal current transfer receipts rose at a $52.2 billion rate on a $39.0 billion increase in unemployment compensation…
Meanwhile, seasonally adjusted personal consumption expenditures (PCE) for March, which were included in the change in PCE in the 1st quarter GDP report, fell at a $1,127.3 billion annual rate to a $13,813.2 billion pace of consumer spending annually, more than 7.5% below that of February’s, after February’s PCE was revised up from the previously reported annual rate of $14,908.8 billion to $14,940.5 billion…the current dollar drop in March’s spending included a $987.6 billion annualized decrease to an annualized $9,383.1 billion in spending for services and a $234.4 billion decrease to $1,314.2 billion in annualized spending for durable goods, slightly offset by a $94.6 billion increase to $3,115.9 billion in annualized spending for nondurable goods…total personal outlays for March, which includes interest payments and personal transfer payments in addition to PCE, fell by an annualized $1,158.2 billion to $14,339.3 billion, which left personal savings, which is disposable personal income less total outlays, at a $2,168.9 billion annual rate in March, up from the revised $1,345.3 billion in annualized personal savings in February…as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 13.1%, up from 8.0% in February, and the highest personal savings rate since November 1981..
While our personal consumption expenditures accounted for 69.3% of our first quarter GDP, before they were included in the 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…..the BEA does that by computing a price index for personal consumption expenditures, which is a chained price index based on 2012 prices = 100, which is then applied to the current dollar spending….from Table 9 in the pdf for this report, we find that that index fell to 110.503 in March from 110.800 in February, giving us month a over month deflation rate of 0.26805% in March, which the BEA reports as a PCE price index decrease of 0.3% in their tables….at the same time, Table 11 gives us a year over year PCE price index increase of 1.3% in March, down from 1.8% in February, and a core PCE price index increase, excluding food and energy, of 1.7% for the past year, both below the Fed’s inflation target….applying the March inflation adjustment to the change in March PCE shows that real PCE was down 7.29677% in March, which BEA reports as a 7.3% decrease in their press release and in the tables, following a February real PCE increase of 0.1%…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….those results are shown in tables 7 and 8 of the PDF, where the quarterly figures given are identical to those shown in table 3 in the GDP report, and which were used to compute the contribution of real personal consumption of goods and services to GDP.
See also:
Construction Spending Rose 0.9% in March after Prior Months Were Revised Lower
The Census Bureau’s report on construction spending for March (pdf) estimated that the month’s seasonally adjusted construction spending would work out to $1,360.5 billion annually if extrapolated over an entire year, which was 0.9 percent (±0.8%) above the revised annualized February estimate of $1,348.4 billion, and 4.7 percent (±1.3 percent) above the estimated annualized level of construction spending in March of last year…the annualized February construction spending estimate was revised 1.3% lower, from $1,366.7 billion to $1,348.4 billion, while the annual rate of construction spending for January was revised 0.1% lower, from $1,384.5 billion to $1,382.963 billion…
A further breakdown of the different subsets of 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 $1,012.5 billion, 0.7 percent (±0.7 percent)* above the revised February estimate of $1,005.8 billion. Residential construction was at a seasonally adjusted annual rate of $550.3 billion in March, 2.3 percent (±1.3 percent) above the revised February estimate of $537.7 billion. Nonresidential construction was at a seasonally adjusted annual rate of $462.3 billion in March, 1.3 percent (±0.7 percent) below the revised February estimate of $468.2 billion.
- Public Construction: In March, the estimated seasonally adjusted annual rate of public construction spending was $348.0 billion, 1.6 percent (±1.3 percent) above the revised February estimate of $342.6 billion. Educational construction was at a seasonally adjusted annual rate of $80.9 billion, 0.3 percent (±1.5 percent)* below the revised February estimate of $81.1 billion. Highway construction was at a seasonally adjusted annual rate of $108.3 billion, 4.6 percent (±4.8 percent)* above the revised February estimate of $103.5 billion.
With the downward revisions to January and February figures, construction spending for those months of the 1st quarter was lower than was reported by the BEA in their advance estimate of GDP that we covered earlier….as we saw above, annualized construction spending for January was revised $1.5 billion lower, and annualized construction spending for February was revised $18.3 billion lower….in reporting 1st quarter GDP, the BEA’s key source data and assumptions (xls) indicated that they had estimated March residential construction would be $1.9 billion more (at an annual rate) than that of the previously reported February figure, that March nonresidential construction would be valued at $446.1 billion, $15.4 billion less than that of the reported February figure, and that March public construction would increase by $2.3 billion from previously reported February levels…totaling those changes, the 1st quarter GDP report showed March construction spending at an annual rate $11.2 billion lower than previously reported February levels…since this report shows that March construction spending was up at an $12.1 billion annual rate from February figures that were revised $18.3 billion lower, that means the total annualized construction figure used for March in the GDP report was $5.0 billion too low…averaging that understatement with the the overstatements in the annual rates of construction spending used for January and February in the GDP report, we find that this report shows that construction spending was overestimated by $4.9 billion (at an annual rate) in the 1st quarter GDP report, implying a downward revision to the related GDP components at a rate that would result in a subtraction of about 0.11 percentage points from first quarter GDP when the 2nd estimate is released at the end of May…we should caution that since our estimate is based on the change in nominal spending, an imbalance of inflation adjustments among the revised components might also have a material impact on the final revision.
See also:
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