November reports on personal income and consumption expenditures, durable goods

while congress was out of town for the holidays, unemployment rations for roughly 1.3 million of us who’ve been unemployed for more than 6 months were cut off this week because the program to pay these stipends, which are typical during times of economic distress, expired…the reason they were not renewed is due to the bipartisan agreement to eschew unbudgeted spending unless they can find cuts in other programs to pay for such spending, which apparently they could not agree on; the estimated cost of renewing federal unemployment insurance for another year is $25 billion; meanwhile, the CBO (Congressional Budget Office) put the cost of upgrading our nuclear weapons stockpile at $355 billion….

November Spending Up 0.5% while Disposable Personal Income Rises 0.1%

the most important economic release of this past week was on Personal Income and Outlays for November from the BEA, which includes several important metrics… first, it includes monthly data on national personal income from all sources, and similar data on disposable income, which is income after taxes; then it details personal consumption expenditures (PCE), which as we’ve noted, typically accounts for almost 70% of GDP, and also total personal savings and the national savings rate, as well as the price index for PCE, which the Fed claims as its inflation target when conducting monetary policy…since we missed covering the October report for this release earlier this month during a week when dozens of delayed economic reports were released, we’ll make note of the important October changes here too, since the 2 months together give us a preview of nearly 45% of 4th quarter GDP….note that whereas dollars amounts in this release are quoted are at annual rates, the percentage changes are month over month, which often leads this data to be incorrectly reported by the media..

total personal income increased by a seasonally adjusted and annualized $30.1 billion to $14,310.3 billion in November, which was 0.2% higher than in October, when personal income decreased at a $11.7 billion annual rate, leaving the 2 month change at an increase of less than .13%…disposable personal income (DPI), which is income after taxes, increased at an annualized rate of $16.2 billion to $12,625.1 billion in November, which was a 0.1% increase over October, when DPI fell by an annualized $25.6 billion; as a result, DPI ended November 0.03% lower than at the end of the third quarter; however, disposable income is now 1.6% above the level of the fourth quarter of 2012, when accelerated bonuses and special dividends related to fiscal cliff tax avoidance schemes caused DPI to spike unnaturally…taxes rose at a $14.0 billion annual rate in November, compared with the $13.8 billion rate of increase in October…real disposable personal income, for which after tax income is adjusted for inflation, rose 0.1% in November after falling 0.2% in October; since inflation has been negligible, that too is just 0.03% lower than September’s real DPI….

the following changes in sources of pre-tax income for each month are all given at seasonally adjusted annual rates: over the 2 months these included private wages and salaries, which increased at a $26.1 billion rate in November, after increasing at a $9.9 billion rate in October….wages and salaries for government workers increased at a $1.0 billion rate, after falling at a $0.1 billion rate in October…supplements to wages and salaries, such as employer contributions to private or government pension plans and insurance, increased at a $3.3 billion rate, after an increase at a rate of $2.3 billion in October…meanwhile, proprietors’ income decreased at a $5.0 billion rate in November, after falling at a $18.1 billion rate in October; these declining proprietors incomes were concentrated in the farm sector; as farm owners incomes fell another $12.0 billion in November after falling at a $22.2 billion rate in October; business proprietors’ income, on the other hand, increased at a $7.0 billion annual rate for the month, after increasing at a $4.0 billion rate in October.. in addition, rental income accruing to individuals was up at a $1.9 billion rate in November, compared with an increase at a $2.1 billion rate in October, and interest and dividend income rose at a $5.9 billion rate, after falling at a $5.4 billion rate in October…and also adding to personal income in November was a $0.6 billion increase in transfer receipts from programs such as Social Security and Medicare, which had fallen at a $1.0 billion rate in October, while subtracting  from the total change were individual contributions to government social insurance, which increased at a $3.7 billion rate in November, after increasing at a $1.4 billion rate in October…

personal consumption expenditures (PCE), which accounted for more than 68% of GDP in the third quarter, rose $63.0 billion to a $11,683.0 billion annual rate in November, which was a 0.5% month over month increase, and October’s PCE increase, originally reported as a spending increase at a $32.7 billion rate and a 0.3% monthly gain, was revised to a 0.4% monthly gain, with personal consumption expenditures growing at a $44.2 billion annual rate…real PCE, which is PCE adjusted to remove the effects of price changes, rose by the same percentages both months, increasing by $43.8 billion at an annual rate in October and by a $56.2 billion rate in November, with November’s increase the largest jump in real PCE in 21 months…on a two month basis, that’s an increase in real PCE at an annual rate of 5.7%, which by itself implies a 3.8% annual growth rate for PCE in the 4th quarter, even if December PCE collapses entirely…real outlays for durable goods rose at a 2.2% rate in November, after increasing at a 1.2% rate in October, with the automotive sector accounting for more than half of the durable goods purchased; real outlays for non durable goods were statistically unchanged in November after growing at a 0.8% rate in October, while spending for services, which accounts for two-thirds of PCE and hence over 45% of GDP, rose at a 0.4% rate in November after increasing at a 0.1% rate in October…

the PCE price index, which is used to adjust personal consumption and other metrics in this report for inflation and which the Fed has targeted to rise by 2.5%, was statistically uncharged in November after falling less than 0.1% in October, leaving it virtually unchanged over the two month period, and up just 0.87% for the 12 months ending November…the core PCE price index, which excludes price changes for food and energy, rose 0.1% in both October and November and is now up 1.12% from a year earlier…a further breakdown reveals that the overall index for prices of goods was down 0.3% in both October and November, as prices for durable goods fell 0.2% in October and 0.3% in November, while prices for non-durable goods fell 0.4% in October and 0.3% in November…prices for services, on the other hand, increased by 0.1% in October and by 0.2% in November…on a year over year basis, prices for all goods are down 1.0%, with prices for durable goods down 2.0%, while prices for services have risen 1.9%…the divergence between prices for goods and services seen here is further confirmation that the method used by the Fed and the NBER to compute real retail sales needs to be refined…another price index generated by this report is for energy goods and services, which was down 1.0% in November and 2.7% year over year…since they apparently use this index, which includes natural gas and electric service, to adjust gasoline sales, it explains why our method of adjusting retail gas station sales with the price index for gasoline indicated a larger increase in sales

personal savings is computed by subtracting total outlays from disposable personal income…total outlays include personal consumption expenditures, personal interest paid, and transfer payments such as fees and fines paid to governments, and rose at a $62.6 billion rate in November to an annualized $12,099.8 billion, compared with an increase in outlays at a $43.9 billion annual rate in October…subtracting total outlays from the $12,625.1 billion of disposable personal income total left personal savings at an annualized $525.4 billion in November, compared with an annualized personal savings of $571.8 billion in October…expressed as a percentage of disposable personal income, those savings resulted in a personal savings rate of 4.2% in November, down from the personal saving rate of 4.5% in October, and the lowest savings rate in 9 months…..our FRED graph below shows the monthly personal savings rate in green since January 2007, with the savings rate indicated as a percentage on the right margin of the graph…also shown is real disposable personal income in blue and real personal consumption expenditures in red over the same time frame, with the scale in billions of chained 2009 dollars for both on the left…note that although both appear to be rising at a decent clip, neither is adjusted for increases in the population…

FRED Graph

New Orders for Durable Goods Rise 3.5% as Shipments, Inventories and Unfilled Orders all hit Record Highs

another monthly release, the Advance Report on November Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf), also showed some significant signs of improvement….the widely watched new orders for durable goods, which are manufactured items generally expected to last more than 3 years, increased by 3.5% in November, but as we’ve noted previously, new orders are notoriously volatile and often swing on the strength of a few large orders for commercial aircraft, which typically aren’t delivered to customers for years…for that reason we also pay close attention to inventories and shipments, which are finished durable manufactures which will be included in the next GDP report, and unfilled orders, which gives us a more complete look at how much factory backlog is yet to be manufactured…

in addition to reporting that seasonally adjusted new orders for durable goods increased by $8.2 billion, or 3.5% to $241.648 billion in November, this report included a revision of new orders received in October, which were originally reported as decreasing by 2.0%, to a decrease of just 0.7%, and an uptick to a 4.2% increase in new orders recorded in September, which was last reported as an increase of 4.1%, so on net new orders were actually 4.9% higher than the $230.3 billion in new orders reported last month…on an unadjusted basis, new orders received so far this year were worth $2,504,660,000, 5.3% higher than orders booked in the first 11 months of 2012…as is usually the case when there’s a sizable month over month expansion, the November increase was driven by an 8.4% increase in orders for transportation equipment, which were $6.3 billion greater than October’s orders at $81.2 billion; that, in turn, was propelled by a 21.8% increase to $11,291 million in new orders for non-defense aircraft and parts, which are now up 25.9% year to date over a year ago…new orders for defense aircraft and parts also rose, by 10.1% to $11,291 million, after falling 28.4% in October…and new orders for motor vehicles and parts were up as well, at $48,554 million 3.3% higher than October’s $47,001 million, and are now 10.5 higher this year than last…

even excluding the volatile transportation sector, new orders for durables were still up a healthy 1.2% in November to $160,460 million, a year to date pace 3.6% above last year’s, as orders for every durable manufacturing sector rose except for primary metals, which slipped 1.0% to $26,533 million, and orders for appliances and electrical equipment, which were down 1.2% month over month to $10,343 million….orders for important capital goods, an indication of business investment rather than consumption, rose 9.1% to $97,144 million, and even excluding aircraft and defense capital goods, orders for so-called core capital goods were up 4.5%, double the most optimistic forecast of economists polled by Bloomberg, and were running at a year to date level 4.3% above last years…importantly, orders for machinery rose 4.5% to $35,644 million, and orders for computers, which had fallen 8.8% in October after rising 8.5% in September, again rose in November by 5.3% to $2,350 million……our FRED graph below shows the monthly percentage change for total new orders for durable goods in red, the change in new orders for capital goods excluding defense in green, and the percentage change in new orders for core capital goods, which takes out volatile aircraft orders, in blue for each month since the beginning of 2012..

FRED Graph

perhaps unfilled orders for manufactured durable goods are a better measure of industry conditions than the widely watched and volatile new orders, which only represent one month’s activity….here we see a slow but steady increase in the order book, as seasonally adjusted unfilled orders, which have been up nine out of the last ten months, rose again in November by 1.0%, increasing $10.5 billion to a new record of $1,058.5 billion in orders outstanding, 7.7% higher than a year earlier…unfilled orders for transportation equipment, up for the past three months, rose by 1.3% to $654,305 million; at $482,517 million, most of that was unfilled orders for commercial aircraft, which were up 2.3% month over month and 14.2% higher than November a year ago; unfilled orders fro defense aircraft fell 2.4% to $64,437 million, while unfilled orders for vehicles and parts fell 0.7% to $16,292 million….

excluding transportation equipment, unfilled orders were up 0.5% at $404,194 million in November, after rising 0.6% in October…and excluding those transports sectors we’ve already mentioned, every other durable manufacturing industry saw its unfilled orders increase except for fabricated metal products, where the order book fell 0.3% to $90,255 million…but unfilled orders for computers and electronics rose 1.2% to $108,707 million, with unfilled orders for communications equipment at $35,287 million 18.1% greater than the year ago order book…and while unfilled orders for machinery rose 0.3% in November to $108,707 million, the total order book for capital goods rose 1.4% to $801,861 million, while unfilled orders for non-defense capital goods rose 2.1% to $636,557 million and was up 13.1% from last year….excluding non defense aircraft and parts, unfilled orders for capital goods were up 1.0% in November and 8.8% higher than a year ago..

seasonally adjusted shipments of durable goods in November, which will be included in 4th quarter GDP as either private or government investment, personal consumption, or exports, rose 1.8% to a one month record of $238.3 billion, following a 0.6% increase in October…shipments of machinery, which have been up for four consecutive months, led the increase, rising 4.5% to $35,644 million…shipments of commercial aircraft were down in November, as they fell 7.5% to $11,291 million….but shipments of defense aircraft were up 16.7% to $5,565 million and shipments of motor vehicles were up 3.0% to $48,672 million, so overall shipments of transport equipment still increased 2.0%…excluding transports, shipments rose 1.6% to $165,547 million, the same pace by which they’ve increased year to date…shipments of capital goods did well, rising 2.3% in November to $85,765 million, and shipments of core capital goods were even stronger, rising 2.8% to $67,300 million, noteworthy strength in an important sector which has only seen shipments rise 1.4% year to date…

while there has been some concern that we’d see a pullback in inventories after the large inventory buildup in the third quarter; it’s not yet evident in inventories of durable goods, as they increased another 0.3% in November, the same percentage increase as was posted in October, as their seasonally adjusted value increased by $1.2 billion to a new record high at $384.7 billion…inventories of transportation equipment, which have been up eighteen of the last nineteen months, were up 0.4% to $120,811 million, after increasing 1.1% in October…that was all due to a 1.8% increase to $67,447 million worth of inventories of commercial aircraft and parts, as inventories of motor vehicles and parts fell 0.9% to $25,221 million and inventories of defense aircraft and parts fell 3.1% to $12,961 million…ex-transportation equipment, inventories of other durable goods industries were up 0.3%, with inventories of computers and related products seeing the largest month over month build up, up 2.5% to a value of $7,509 million…but inventories of machinery were down 0.3% at $66,029 million, which contributed to a core capital goods inventory figure which was statistically unchanged, up just $39 million from October to $119,702 million in November..

a good reality check on whether inventories are becoming excessive or not is to compare them to the level of shipments or unfilled orders over time, which allows us to see if inventories are appropriate for the amount of orders coming in and goods being shipped…that’s what our FRED graph below attempts to do; the red graph is a simple metric direct from FRED showing the ratio of inventories to shipments of durable goods; that’s an indication of how long inventory stockpiles will last at the current sales pace, and it fell to to 1.61 months in November from 1.64 months in October, and it’s now at the lowest since March 2011…the blue graph below is a similar ratio of unfilled orders to inventories; it is created by dividing seasonally adjusted Unfilled Orders for Durable Goods Industries (AMDMUO) by Total Inventories for Durable Goods Industries (AMDMTI), with both expressed as monthly dollar amounts; what this shows is that in the early part of last decade, the dollar value of unfilled orders was less than twice that of inventories, and gradually grew to three times inventories heading into the recession, when both metrics shrunk…over the last year, that part of the graph we’re interested in, it shows that unfilled orders are growing faster than are inventories, and although that leveled off in the third quarter, unfilled orders are again growing faster than inventories…

FRED Graph

(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…)

This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s