July jobs report, 2nd quarter GDP and revisions, June Income and Outlays

slightly less job creation than we’ve seen recently, the downward revision of 2 previous month’s job growth, an unemployment rate that dropped in part due to lower labor force participation, a shorter workweek, lower average hourly earnings, and continued high percentages of temporary or part time jobs combined to make July’s employment report what was probably the lousiest jobs report we’ve seen all year…

FRED Graph

according to the establishment survey conducted the 2nd week of the month, net payroll employment increased by 162,000 to a seasonally adjusted 136,038,000 jobs in July, with more than half that increase coming from the typically low paying retail and food service sectors…in addition, the net job creation in June was revised from last months reported 195,000 to 188,000, and the change in payroll employment in May was revised from 195,000 jobs added to an increase of 176,000…actual July payroll employment before the seasonal adjustment was given at 135,664,000…recall that this survey sample covers firms & agencies representing roughly one-third of US employment, and the 90% confidence interval is on the order of plus or minus 90,000 jobs, so some inaccuracies and revisions are par for the course…

of the seasonally adjusted job increases in July, 48,600 were in retail sales, including 9,100 in general merchandise outlets, 8,100 in groceries, 6,200 at car and parts dealers, and 5,700 at building material and garden supply stores; an additional 38,400 net new jobs were in restaurants and bars…other sectors seeing net job growth were in professional and business services, which saw 36,000 net new jobs including 8,300 in administration and support services and 7,700 in temporary help services, financial services, where 15,000 jobs were added including 5,600 in securities, commodities, and investments, and wholesale trade, with 13,700 net new jobs…in addition, 9,000 jobs were added in information services, 8,300 new jobs were added in health care services, 5,000 more in education, while manufacturing industries added a net 6,000 jobs and 6,000 jobs in construction were lost…net jobs in government were little changed, with 2,000 less positions at the federal level and 3,000 more at the state and local level..

the average seasonally adjusted workweek for all nonfarm payroll employees decreased by 0.1 hour in July to 34.4 hours, while the average workweek for production and nonsupervisory employees decreased by 0.1 hour to 33.6 hours…in manufacturing, the workweek was reduced by 0.2 hour to 40.6 hours, with an additional average of 0.2 hours less overtime at 3.2 hours…average hourly earnings for all payroll employees in July was two cents lower than June at $23.98, while the average hourly earnings for non-supervisory personnel was unchanged at $20.14…

our FRED bar graph above shows the monthly changes in payroll employment from this survey, also called the Current Employment Statistics (CES) survey, since the beginning of 2008…below, we have a FRED bar graph which shows the monthly change in thousands in employment in 5 of the major CES job categories and 3 major component categories for each month since the beginning of 2012; we have the monthly change in manufacturing employment each month in blue, the change in monthly construction employment in red, the change in retail employment in dark green, and the change in government jobs in yellow…in grey, we have the monthly change in employment in professional and business services, which includes everything from management of companies to cleaning the toilets and hauling away the trash, while in light green we have jobs added working in bars and restaurants, the major component of the leisure and hospitality category; finally, we have the two major components of the education and health services category: the change in jobs in health care is shown in orange, while the change of jobs in education is shown in violet…you can click on the chart below for a larger picture of this graph at the FRED website…

FRED Graph
the monthly survey of 60,000 households, the source of the data that’s extrapolated to give us the unemployment rates and other population metrics, has a large margin of error and should not be considered the source of firm data, especially in conducting monetary policythe 90% confidence interval for the monthly change in the number unemployed is is on the order of +/- 300,000, and the monthly change in the unemployment rate has an 90% accuracy range of +/- 0.2 percentage points…we’ll look at the data this Current Population Survey (CPS) provides for the trend, but the monthly numbers are highly volatile and should not be considered as much more than a long term guide of employment changes…

FRED Graph

extrapolations from the July household survey indicated that the seasonally adjusted number of us employed rose by 227,000 to 144,285,000, while the number of us unemployed shrank by 263,000 to 11,514,000; an additional 89,957,000 adults were considered not in the labor force, as that metric of those of us who aren’t counted rose by 240,000…with the civilian non-institutionalized population now higher by ~204,000, that left the labor force 37,000 smaller and the percentage of those counted as unemployed at 7.4%, the lowest unemployment rate since November 2008…the employment rate, aka the employment-population ratio, remained unchanged at 58.7%, but the labor force participation rate, the other important metric we watch from this survey, fell to 63.4% from 63.5% in June…the above FRED graph shows the trend of monthly readings for the employment-population ratio in blue, and the trend for the labor force participation rate in red…

the seasonally adjusted employment rate for men over 20 fell to 67.5% in July from 67.6% in June and 67.7% a year ago, while their unemployment rate was unchanged from June at 7.0% but down from 7.7% a year ago; for women over 20, the employment ratio rose to 55.1% from 55.0% in June and 54.8% a year earlier, while their unemployment rate fell to 6.5% from 6.8% in June and 7.5% a year ago…for blacks of both sexes, the employment rate rose to 53.7% in July from 53.0% in June and 52.9% a year earlier, and the July black unemployment rate fell over a full percent, from 13.7% in June to the current 12.6%; it was at 14.1% in July 2012…the seasonally adjusted employment rate for white teenagers was 29.5%, down from 29.7% in June but up from 29.3% a year earlier, while the employment rate for black teenagers was 16.6% in July, up from 15.8% in June but down from 18.7% a year ago…

those of us who were working part time in July who wanted full time work increased by a seasonally adjusted 19,000 to 8,245,000, but the broad U-6 unemployment rate, that includes those working part time for economic reasons, fell from 14.3% in June to 14.0% in July…in addition, those who report they’re working part time voluntarily rose by 84,000 to 19,128,000…note that the establishment survey covered earlier does not distinguish between full and part time job creation, and that some of those voluntary part time workers may be holding two jobs…the household survey now shows 6,897,000 of us holding more than one job, which is 4.8% of all those employed…

among those of us not counted in the labor force and hence not counted as unemployed, 6,862,000 still reported that they want a job; 2,414,000 of those are categorized as “marginally attached to the labor force” because they’ve  looked for work sometime during the last month, but not during the 30 day period covered by the July household survey; the labor department calls 988,000 of them “discouraged workers” because they reported that they’re not looking for work because they believe there are no jobs available to them…the number of these “discouraged workers” has increased by 136,000 from 852,000 in July of 2012..

the major story in the release of the 2nd quarter GDP was not that the 2nd quarter growth beat expectations by rising at a 1.7% rate, but that the estimates released on Wednesday reflected both a change in the components of GDP and an annual as well as a comprehensive (or benchmark) revision of the national income and product accounts going back to 1929, from the beginning of that measure of our economic history…that overhaul also inflicted major changes on the first quarter GDP, which a month ago surprised us when we saw it revised from the earlier reported 2.5% to 2.4% growth to an annual rate of 1.8%…with this release, the growth rate in the 1st quarter of this year has taken another hit and is now seen as having grown only at an annual rate of just 1.1%…furthermore, with growth in the 4th quarter of 2012 also having been revised to a 0.1% rate from the 0.4% last reported, we’ve now seen 3 quarters of a year pass where the average economic growth has slumped below 1.0% annualized…

the most important change to GDP with this comprehensive revision is to include creation of intellectual property in the investment component of GDP, which ultimately increased our GDP by $559.8 billion, or 3.6% larger than it was before this week…this includes capitalization of research and development, which had previously been treated as an expense, and capitalization of entertainment, literary, and artistic works judged to have a long-lasting value to the businesses or institutions that own them (Seinfeld is one example)…if you accept the premise of judging our national net worth by its dollar value, then these changes were a long time in coming, as our national products accounts already recognized capital investments in other intangible assets such as software…

other changes include an expanded recognition of ownership transfer costs for residential real estate investment, a change in accounting for transactions of defined benefit pension plans to an accrual basis, recognizing the costs of unfunded liabilities, and a change in the benchmark year for real variables in national accounts from 2005 to 2009; the effect of which will be to increase the inflation adjusted basis of GDP and its components, as chained 2009 dollars are used instead of the previously used chained 2005 dollars..further details on these and other changes, which received little coverage by the blogs or the media, are here (pdf) 

GDP revisionthe net effect of all the benchmark revisions exacted this week is illustrated by the above chart from the report, which shows the additions to GDP over the span from 2002 to 2012 in billions of dollars by the upper dashed line vis a vis what it was previously…the net effect of the statistical changes over the same period is shown by the lower dashed line, which you’ll note had tended to be neutral or a subtraction until 2012..the combination of the two yields the dark line, which represents the total revision to GDP in billions over this period…the larger point to be made here is that these changes to GDP are to the gross amount and they’ve already been applied over time, and subsequent quarter over quarter GDP reports will still represent the annualized percentage growth rate from one quarter to the next under the same expanded definitions; thus if new R&D or the value of capitalized entertainment now falls from one quarter to the next, it will be a drag on GDP, just as a decrease in homebuilding would lower the investment component of GDP for that quarter…

as we just covered first quarter GDP last month and it has now been significantly revised, we’ll take a quick look at what the revisions were that reduced first quarter growth from an annual rate of 1.8% to a 1.1% rate…personal consumption expenditures were thought to be up at a seasonally adjusted 2.6% annual rate in the 1st quarter, and the annual rate of change has now been revised to a 2.3% increase; and thus the contribution from consumers to the change in first quarter GDP was reduced from 1.83% to 1.54%…similarly, gross private investment was originally thought to have grown at a 7.4% rate in the 1st quarter, and that’s now been revised to a 4.7% growth rate; and the effect of this revision was to subtract .25% off top line first quarter GDP, leaving the contribution to the GDP change from investment at .71%…fixed investment, which had been thought to be up 3.0%, actually fell 1.5%, mostly due to a 25.7% shrinkage in non-residential construction…the change in private inventories, on the other hand, were found to be 63% greater than originally thought, and instead of just adding .57% to the first quarter growth rate, they now have added .93%…but another big hit to 1st quarter GDP came from a worse than first published balance of trade; exports, originally thought to be off a seasonally adjusted 1.1% annual rate in the first quarter, were found to be off 1.3% instead, and took .18% off the final GDP figure…and imports, which were thought to have been down 0.4%, were actually up at a 0.6% rate, and as increasing imports subtracts from GDP, that switch turned imports from a 0.6% addition to GDP to a subtraction of .10%…and finally, government was slightly less a drag than originally estimated; federal government spending and investment was off .84 instead of the .87 in last month’s print, while state and local governments only shrunk 1.3%, not the 2.1% originally reported..so instead of subtracting .93% from the GDP change, shrinking government spending only subtracted 82% from the first quarter GDP…

one footnote to first quarter GDP we should include is of that large contribution from growing inventories, the lions share was an increase in winter farm inventories, some of which appears a seasonally adjusted statistical rebound from the drought suppressed inventory levels in the summer and fall of last year…instead of the original record .83% addition to the first quarter growth rate from farm inventories, the contribution has been increased to .88%, more than four times larger than any previous annual contribution from farm inventories over the decade…in other words, since the economy only grew at a 1.1% rate in first quarter, and .88% of that was growth in farm inventories, 1st quarter GDP growth would have printed just +0.2% without them

in the 2nd quarter, real gross domestic product, or the output of all goods and services produced by labor or property in the US, rose at a seasonally adjusted 1.67% annual rate to $15,648.7 billion from the first quarter figure of $15,583.9 billion, based on the chained 2009 dollars on which all comparisons are now made…in current dollars, US GDP now stands at $16,633.4 billion, up from the $16,535.3 billion and the $16,420.3 billion at year end 2012…the BEA emphasized that this 2nd quarter advance estimate is based on incomplete source data and is subject to revision at the end of each of the next two months, a process we’ve seen time and again and just noted in the first quarter which originally was reported to have grown at a 2.5% rate and is now in the books at 1.1%…but even with BEA’s leading rejoinder, that wont stop the media from treating these numbers as gospel…

we should point out that all dollar amounts and percentages in each GDP report are given at a seasonally adjusted annual rate, which means that the real dollar increase or decrease for any quarter is extrapolated out to an annual amount based on normal seasonally factors; what that means in practical terms, for example, is that if consumer spending in the first three months of the year normally only amounts to one-fifth the annual total, the real dollar amount of consumer spending in the first quarter will be quintupled in the reported numbers…a similar annualization is applied to the percentages; ie, for the widely reported second quarter GDP growth of at 1.67%, that’s at an annual rate and really means that the the national output of goods and services really only rose a bit more than 0.4% over the April through June period…and since that’s the way they’re reported, it’s those annualized figures that well be looking at..

real personal consumption expenditures in the second quarter were at a seasonally adjusted annual rate of $11,430.3 billion, increasing at an annual rate of 1.8% from the revised first quarter’s $11,379.2 billion rate, and contributed 1.22% to the 1.67% annualized growth rate in the GDP…consumer spending on durable goods increased at a 6.5% annual rate to $1,258.3 billion annualized and contributed .48% to the quarter’s growth rate; spending on nondurable goods increased at a 2.0% rate to $2,593.2 billion and contributed .31%, while personal outlays for services increased at a 0.9% annual rate to $7,578.7 billion and contributed 0.43% to the increase in 2nd quarter GDP…

we should also note that the amounts here are given in current dollars, but the BEA now computes the quarter over quarter annualized percentage changes based on chained 2009 dollars, which is an odd year to benchmark one’s inflation adjustment to, since it represents the deflationary depth of the recession…this has the potential to result in some apparent distortions in current data; for instance, the seasonally adjusted annual rate of consumer spending for non-durable goods actually dropped 2.1% from $2,607.0 billion in the 1st quarter in seasonally adjusted current dollars to $2,593.2 billion in second quarter, but the adjustment of that from nominal dollars to chained 2009 dollars resulted in a 2.0% annualized rate of increase, ie (2,333.7/2,322.2)^4 = 1.0199564, or a 2.0% increase rounded…refer to GDP full release with tables (pdf), table 3B, page 44, line 9, for 2009 chained dollars; table 3A, page 38, line 9 for current dollars) 

continuing with our report, overall gross private investment increased from a seasonally adjusted $2,555.1 billion annualized in the 1st quarter to $2,620.0 billion in the 2nd quarter and added 1.34% to the quarterly rate of change; non-residential investment increased to $2,028.3 billion, a 4.6% annualized rate above the first quarter and added 0.93% to GDP; of that, investment in non-residential structures increased 6.8% annualized to $441.4 billion and added .17%, investment in equipment increased at a rate of 4.1% to $936.2 billion and added .23%, while the value of intellectual property increased 3.8% to $650.6 billion and added .15%…in addition, real residential fixed investment increased 13.4% to $513.0 billion and added .38% to the change in GDP…private inventories increased by a seasonally adjusted $78.7 billion in the 2nd quarter and added 0.41% to the second-quarter GDP rate of change…another seasonally adjusted increase in farm inventories accounted for $42.1 billion of that and accounted for .13% of that change…

as always, our negative balance of trade subtracted from GDP, at a $505.3 billion annualized rate in the 2nd quarter, but it is the change in exports and imports from quarter to quarter that affects the change in GDP which we’re looking at here…inflation adjusted exports of goods and services increased at a seasonally adjusted rate of 5.4% to $2,227.2  billion in the second quarter and added .71% to the annual rate of GDP increase, while net real imports increased 9.5% to $2,765.7 billion and subtracted 1.51% from 2nd quarter growth rate.. thus with imports increasing more than exports, net exports were a .81% drag on the 2nd quarter GDP growth rate…

net government spending and investment, which shrank to an annualized $3,121.6 billion in the 2nd quarter, was again a drag on growth, but not as much as the preceding two quarters…real federal outlays and investment shrunk by 1.5% to $1,252.5 billion and subtracted from second quarter growth at a .12% annual rate…defense spending, which had been down at a 12.0% rate in the first quarter and 22.1% in the last quarter of 2012, shrank another 0.5% to $776.1 billion, while non-defense spending and investment fell 3.2% to $476.4  billion (note that government transfer payments, such as social security and medicare, are included in personal consumption expenditures)… meanwhile, state and local government expenditures and gross investment rose for only the 2nd time since the 3rd quarter of 2009, by 0.3% to $1,869.1  billion in the quarter. and made a tiny contribution of 0.4% to the 2nd quarter rate of change…

our FRED graph below shows the change, in billions of chained 2009 dollars, in each of the major components of GDP, over each quarter, for the last two years…those components that contracted in a given quarter are shown below the zero line and subtract from GDP, those that are above the line grew during that quarter and added to GDP; the exception is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so when imports shrink, they will appear above the line as an addition to GDP, and when they increase, as they have in the recent quarter, they’ll appear below the zero line…otherwise, real personal consumption expenditures is shown in blue, gross private investment, including structures, equipment and intangibles, is shown in red, exports are shown in purple, and the change in private inventories is in yellow…lastly, the change in state and local government spending and investment is shown in pink, while the change in Federal government spending and investment is shown in grey…

FRED Graph

another important release from the BEA this week that completely slipped under the radar was the report on June Personal Income and Outlays, which tended to be ignored by the blogs and the media because it crossed the wires the same time Friday morning as the July unemployment report…but this report is arguably one of the more important of the regular monthly economic releases, as it not only gives us gross national figures on personal income and disposable income after taxes, but also gives us the monthly aggregate amount of personal consumption expenditures (PCE), which accounts for roughly 70% of the economy, total personal savings and the national savings rate, as well as the price index for PCE, which the Fed uses as it’s inflation gauge when setting monetary policy…

BEA Q2 income revisions

like the GDP report we’ve just reviewed, earlier releases of this report underwent a major revision as of this report of data back to 1929 associated with the 14th comprehensive revision of the national income and product accounts…included were major definitional changes to personal income, including using an accrual approach for measuring defined benefit pension plans, which resulted in upward revisions to personal income receipts on assets for the entire period and upward revisions to income supplements for employer contributions for employee pension and insurance funds for most years…the estimates of proprietors’ income were also changed to more accurately account for capital gains and losses attributable to corporate partners…the cumulative effect of these and other changes on each of the categories of personal income over the past four years is shown in the above chart from the BEA and discussed in more detail in the latter half of the press release

for June, seasonally adjusted personal income increased at an annual rate of $45.4 billion to an annualized $14,102.9 billion, 0.3% higher than May’s annualized $14,057.5 billion; this was still $362.7 billion, or 2.5% below the gross income level of December of 2012, when special dividend payments, bonuses, and other fiscal cliff related tax avoidance schemes boosted incomes to an annualized $14,420.2 billion…June disposable personal income (DPI), which is income after taxes, rose at a $33.6 billion rate to $12,428.2 billion, also 0.3% higher than May, and also below the $12,829.2 billion annualized DPI of December…

wages and salaries, which account for roughly half of income, did unusually well in June, rising at a $38.0 billion clip, with only government wages and salaries falling at a $0.5 billion rate; other sources of income in June included income receipts on assets (ie, interest and dividend income), which increased at a $22.7 billion rate, rental income, which was $1.5 billion higher, and business proprietors income, which rose at a $2.3 billion clip…in addition, transfer payments were $6.0 billion higher at an annual rate, led by a $4.2 billion increase in social security payments…meanwhile, contributions to government social insurance, which subtract from income, rose at a $4.9 billion rate, and farm owner’s incomes fell at a $24.0 billion annual rate…

spending increases outpaced incomes in June, as personal consumption expenditures (PCE) rose $59.4 billion, or 0.5%, to an annualized $11,476.3…spending for durable goods rose $10.7 billion to $1,267.8 billion, while spending for non durables rose $33.5 billion to $2,619.4 billion and spending for services rose $15.2 billion to $7,589.1 billion, all at a seasonally adjusted annualized rate..

FRED Graphtotal personal outlays, which includes personal interest payments and personal transfer payments in addition to PCE, increased $55.3 billion to an annualized $11,881.5 billion in June; personal savings, which is disposable personal income minus total outlays, was thus at $546.6 billion in June, down a bit from the $568.3 billion of savings in May; this left the personal saving rate, which is savings as a percentage of disposable personal income, at 4.4% in June, compared with the 4.6% year to date high savings rate in May…this and the track of other major metrics from this report can be seen on our above FRED graph, which shows the personal savings rate in green, real disposable personal income in blue, and real PCE in red since January 2000…

the metrics for real disposable personal income (DPI) and real personal consumption expenditures (PCE) shown above are arrived at by adjusting DPI and PCE for inflation using the PCE price index, which is also generated with this report, and which we’ve noted, is the Fed’s preferred inflation gauge…the price index for PCE increased 0.4% in June, in contrast to an increase of 0.1% in May and a negative 0.3% in April…the result of applying this deflator was to change real disposable personal income into a 0.1% decline, and to reduce real personal consumption expenditures to a 0.1% increase…the June core PCE price index, which excludes food and energy, was up 0.2 percent, up from 0.1% in May…the year over year rate on the headline PCE price index has now risen from last month’s 1.07% to 1.31%, while the year over year Core PCE price index is unchanged at 1.22%, both well below the Fed’s target of 2.5%

(the above is my weekly commentary that accompanied my 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 getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)

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