guestimating 1st quarter GDP from 2 months of personal consumption, trade, construction spending and factory inventories data

in addition to the Employment Situation Summary for March from the Bureau of Labor Statistics, this week also saw the release of four reports that together will make up the lion’s share of the February contribution to 1st quarter GDP: the February release on Personal Income and Spending from the Bureau of Economic Analysis, the February Report on our International Trade, the Full Report on Manufacturers’ Shipments, Inventories and Orders for February and the February report on Construction Spending, all from the Census Bureau…as we did when those 4 reports were released for January, we’ll look at them to see how they might affect first quarter economic growth figures… other popular reports released this past week included the S&P/Case-Shiller House Price Indexes for January, which reported a 4.5% year over year increase in its national index, and the March Manufacturing Report On Business from the Institute for Supply Management (ISM), which saw its broad purchasing managers index (PMI) fall to 51.5, the lowest reading since May 2013…and in the last of the regional Fed manufacturing reports for the month, the Dallas Fed Manufacturing Survey for March saw its broad business activity index decrease by 6 points to -17.4, indicating a not unexpected ongoing contraction in the oil patch…

March Jobs Report the Worst in Nearly 3 Years

the Employment Situation Summary for March from the BLS indicated that employers added a seasonally adjusted 126,000 jobs in March, making it the worst month since December 2013…in addition, January and February jobs totals were revised down 69,000, so on net we only gained 57,000 spots from the total reported last month; we’d have to go back to June 2012 to find another month that bad…moreover, the household survey saw another 277,000 drop out of the labor force, bringing the number of those not counted up to a record 93,175,000..thus, the labor force participation rate fell back to 62.7%, which appears to equal the lowest since February 1978…it’s hard to believe that we could go from such a great series of employment reports to this bad in just one month, but most of the other data has looked weak, so we shouldn’t be surprised…

the BLS press release itself is very readable, so you can get further details from there…note that almost every paragraph in that release points to one or more of the tables that are linked on the bottom of the release, and those are also on a separate html page here that you can open it along side the press release to avoid the need to scroll up and down the page….thus, when you encounter a line such as “The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 2.6 million in March”. (See table A-12.) you can quickly open Table A-12.to get the details on what the change really was….for those who want to see some associated graphics, it looks like The March Jobs Report in 11 Charts from the Wall Street Journal is the best we have this week…

Real Personal Consumption Expenditures Growing at a 1.56% Rate Year to Date

the key report in determining the trajectory of GDP is the monthly report on Personal Income and Outlays from the Bureau of Economic Analysis, which give us the monthly data on our personal consumption expenditures (PCE), the major component of GDP, and the PCE price index, 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 that spending indicated…the report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate…however, the dollar amounts reported are not the February change, but they’re seasonally adjusted and at an annual rate, ie, they tell us what income and spending would be for a year if February’s adjusted income and spending were extrapolated over an entire year…confusingly, however, the percentage changes are computed monthly, and in this case they give us the change in each metric from January to February…and of course the price index changes are also reported on both a month over month and year over year basis..

so when the opening line of the press release for this report tell us “Personal income increased $58.6 billion, or 0.4 percent, and disposable personal income (DPI) increased $54.2 billion, or 0.4 percent, in February“, they mean that the annual figure for personal income of February was 0.4% greater than the annual personal income figure for January; the actual February increase in personal income over January is not given…similarly, disposable personal income, which is income after taxes, rose at by 0.4%, from an annual rate of $13,265.6 billion in January to an annual rate of $13,319.8 billion in February…the contributors to the increase in personal income, listed under “Compensation” in the press release, are also annualized amounts, all of which can be seen in the Full Release & Tables (PDF) for this release…so when the press release says, “Wages and salaries increased $23.9 billion in February” that really means wages and salaries would rise by $23.9 billion over an entire year if February’s increase were extrapolated over an entire year…so you can see what’s written here is nearly inscrutable, and often leads to misreporting the data the same way the BEA describes it…

for the personal consumption expenditures (PCE) that we’re interest in, BEA reports that they increased $11.8 billion, or 0.1 percent, which means the annual rate of PCE rose from $12,093.5 billion in January to $12,105.3 in February, while December’s PCE were revised to a $12,122.0 annual rate, still statistically 0.2% higher than January…but as we 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….that’s done with the price index for personal consumption expenditures, which is included in this report, which is a chained price index based on 2009 prices = 100….looking at Table 9 in the pdf, we see that that index rose to 108.281 in January from 108.301 in December, giving us a month over month inflation rate of 0.17%, which BEA reports as a 0.2% increase, in contrast to the 0.4% decrease of January…

now, when each of those price indexes are applied to that month’s annualized PCE, it yields that month’s annualized real PCE in chained 2009 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….that result is shown in table 7 of the PDF, where February’s chained consumption works out to 11,158.6 million, 0.07% less than January’s 11,166.8 million, which the BEA rounds to a 0.1% decrease in real PCE… (labeling chained dollar amounts with a “$” doesn’t seem right, because they are closer to a quantity index)

however, for estimating the change in GDP, the month over month change doesnt buy us much; we have to compare January and February to the results of October, November and December…always thoughtful as they are, the BEA provides the annualized chained dollar PCE for those three months in the GDP report , as revised last Friday…in table 3 of the pdf for the GDP report, we see that the annualized real PCE for the 4th quarter was represented by 11,119.6 million in chained 2009 dollars…since we dont yet know real PCE for March, the conventional method of estimating the 1st quarter change in real PCE is to average the two months we do have and compare it to that…when we do, we find that real PCE has grown at an annual rate of 1.56% so far this year, over the 4th quarter of 2014…note the math: (((11,158.6 +11,166.8 ) / 2) / 11,119.6 ) ^ 4 = 1.01559453…given that real PCE is about 68% of GDP, we would thus estimate that real PCE would add 1.06 percentage points to 1st quarter GDP…

Real Year to Date Goods Exports Down at a 25.7% Rate, Goods Imports Down at a 24.7% Rate

February trade figures appear to have been impacted by the west coast dock strike (which has since been settled); nonetheless, the results are included in our national product accounts without an asterisk, just like weather related impacts of any other unplanned economic disruptions…the February report on our international trade in goods and services showed that our seasonally adjusted goods and services deficit fell by $7.2 billion to $35.4 billion, down from the revised January trade deficit of $42.7 billion, as our February exports fell $3.0 billion to $186.2 billion, and our February imports fell $10 2 billion to $221.7 billion…our exports of capital goods fell by $1.66 billion on a $628 million drop in exports of civilian aircraft; our exports of industrial supplies fell by $1.41 billion on decreases in exports of non-monetary gold, crude oil, fuel oil & plastics exports, and our automotive exports fell by $1.09 billion…we imported $2.6 billion less capital goods, $1.45 billion less consumer goods, and despite a 12.5% increase in prices for imported crude oil, imports of crude fell by $2.28 billion, leading a $4.35 billion drop in imports of industrial supplies and materials…itemized lists of the value of our monthly and year to date exports and imports can be viewed in exhibit 7 and exhibit 8 of the full pdf for this release

what we would normally do to estimate the impact of these trade figures on GDP would be to adjust each with the appropriate price for that item or category from the Import and Export Price Indexes for February, quite a tedious process…however, this week we’ve noticed that exhibit 10 in the full pdf for this report gives us ready to use monthly goods trade figures by end use category and in total in chained 2009 dollars (mea culpa, easy to miss in a 54 page pdf)…since the February change in export of services and imports of services was less than $0.1 billion in both cases and will not impact GDP much, we can go right to that table to make our estimates..

as you’ll recall, all data in the GDP report is at an annual rate, so we’ll have to compute an annual rate with the monthly data we have…our seasonally adjusted exports of goods in chained 2009 dollars for October, November and December were $124,329 million, $123,379 million, and $123,120 million respectively; hence, our inflation adjusted goods exports in the 4th quarter were at an annual rate $1.483 trillion; our inflation adjusted goods exports for January and February totaled $232,660 million, or at a $1.396 trillion annual rate….that would amount to a 5.9% quarter over quarter drop in our exports, meaning that our real 1st quarter to date goods exports have fallen at 25.7% annual rate…since goods are about 2/3 of our total exports, that would indicate we could estimate that 1st quarter exports have fallen at a 17.1% annual rate, or at a rate that would subtract 2.24 percentage points from 1st quarter GDP..

meanwhile, our seasonally adjusted imports of goods in chained 2009 dollars for October, November and December were $174,028 million, $172,042 million, and $177,145 million respectively, thus, our real 4th quarter imports of goods were at a $2.093 trillion annual rate…our total real imports of goods for January and February combined were $329,017, or at a $1.974 trillion annual rate…that means our inflation adjusted imports of goods fell by 5.7%, or at a 24.7% annual rate…since our imports of services, virtually unchanged, count for about 2/9ths of our total imports, we could estimate that our overall 1st quarter imports fell at a 19.2% annual rate, or at a rate that would add 2.99 percentage points to 1st quarter GDP…

Year to Date Real Construction Spending Also Down

in their report on February construction (pdf), the Census Bureau estimated that our seasonally adjusted construction spending would work out to $967.9 billion annually if extrapolated over an entire year, which was 0.1% (±1.2%)* below the revised January annual rate but 2.1 percent (±1.6%) above the estimated adjusted and annualized level of construction spending of February last year…January’s spending estimate was revised from $971.4 to $967.9 billion, which means the January drop in construction spending now works out to 1.7% lower than December, not the 1.1% drop originally reported…..private construction spending was at a seasonally adjusted annual rate of $698.2 billion, 0.2 percent (±1.0%) above the revised January estimate, with residential spending falling to an annual rate of $349.9 billion, 0.2 percent (±1.3%) below the revised January estimate while non-residential construction rose 0.5 percent (±1.0%) to $348.4 billion…meanwhile, public construction spending was estimated at  $268.9 billion annually, 0.8 percent (±2.0%) below the revised January estimate, with public power, water and sewage construction all off substantially….

construction spending inputs into 3 components of GDP; investment in private non-residential structures, investment in residential structures, and into government investment, for both state and local and Federal governments…as we pointed out a month ago, the National Income and Product Accounts Handbook, Chapter 6 (pdf), lists a multitude of privately published deflators for the various components of non-residential investment, while they use the Census Bureau construction price indexes for new one-family houses under construction and for new multi-family homes under construction for residential investment…while the later indicates 0.4% monthly inflation for residential, the best we could estimate for the price change for other types of construction would be to use the same deflator as was used in the last GDP release, which worked out to be a one month deflator of 0.1% for public and non-residential construction, figuring construction prices were not very volatile over a few months…furthermore, because the GDP categories for construction spending include brokers’ commissions, title insurance, state and local taxes, attorney fees, title escrow fees, fees for surveys and engineering services, and remodeling not captured by this report, we had to generate our own quarter to quarter comparisons from the data included here…

thus, using the monthly annualized data for October, November and December, we find that 4th quarter residential construction spending was at a seasonally adjusted annual rate of $353,565 million, and that the average of residential construction for January and February reduced by the 0.4% monthly deflator was $353,704 million…thus we’d estimate that residential construction has barely eked out a 0.16% annual rate of increase in the 1st quarter, a change so statistically small that it would not have a noticeable impact on GDP growth…for private non-residential construction, we find that 4th quarter non-residential construction was at a $350,928 million annual rate, while averaging January and February deflated by 0.1% per month gives us 1st quarter non-residential construction at a $346,911 million annual rate…hence, investment in non-residential structures is down at a 4.5% annual rate so far in the 1st quarter, a decrease which would subtract .13 percentage points from first quarter GDP should it persist…finally, we find that public construction averaged at a $280,647 million annual rate over the 4th quarter, while public construction for January and February adjusted for inflation works out to a $269,553 million annual rate…hence, government investment spending is down at a 14.9% annual rate so far in the 1st quarter, a decrease which would subtract .29 percentage points from the change in 1st quarter GDP should it continue…

Change in Real Factory Inventories Slows Year to Date

the last report from this week that we’ll look at with an eye as to how it might affect first quarter growth figures is the Full Report on Manufacturers’ Shipments, Inventories and Orders for February( pdf) from the Census Bureau, which usually goes by just “factory orders” in the business press, although new or unfilled orders aren’t our concern today, as we’ll be looking at shipments of equipment and inventories…this report did indicate that new orders for manufactured goods rose for the first time in 7 months, increasing $0.8 billion or 0.2 percent to $468.3 billion, as new orders for non-durable goods rose by 1.8%, due in part to a rebound in prices for refinery products…unfilled orders, on the other hand, were down for the 3rd month in a row, falling by $5.9 billion or 0.5 percent to $1,156.3 billion…nonetheless, unfilled factory orders are still running 8.4% above those of a year ago, so there shouldn’t be any general factory slowdown in the offing as a result of recent orders downturn..

factory shipments rose for the first time in 5 months in February, increasing $3.6 billion or 0.7 percent to $481.3 billion, on the heels of a 2.3% decrease in January…shipment of durable goods fell by 0.2% on a 1.3% decrease in shipments of primary metals, a decrease that may have more to do with price than quantity…shipments of non-durable goods rose by 1.8%, largely on a 11.3% increase in shipments from refineries…however, most of the shipments reported here will be included in one of the other components of GDP, such as those destined for export, personal or government consumption, and not directly included as reported here…the one exception is that the investment in equipment component of GDP, that can be guessed at from shipments of non-defense capital goods in these census reports…shipments of non-defense capital goods rose to $80,139 billion in February from $80,098 billion in January; that’s an increase of a bit more than 0.1% after a 0.8% increase in January…producer prices index for a wide variety of equipment with no overall index aren’t very useful in determining a deflator, but table 4 from the GDP pdf indicates prices for equipment rising at a 0.6% rate in 2014 and at a 1.2% annual rate in the 4th quarter, so we’d guess equipment prices would likely still rise on the order of 0.1% a month early this year….as shipments of non-defense capital goods averaged $79.43 billion in the 4th quarter, that would indicate that inflation adjusted shipments of capital goods rose at a 2.9% annual rate in the first quarter….if we use that as a proxy for the 1st quarter increase investment in equipment, it would add .18 percentage points to GDP..

factory inventories, meanwhile, rose by $0.9 billion or 0.1% to $651.0 billion in February after a 0.4% decrease January, which was at least in part to lower priced inventories at refineries…the change in factory inventories is included directly in GDP, along with other retail, wholesale and farm inventories, and we want to know if the change in inventories in the 1st quarter is greater than or less than the change in inventories was in the 4th quarter…however, as we explained 3 weeks ago, companies use a wide variety of accounting methods in valuing their inventories, such as LIFO, FIFO, average cost or weighted average cost, all of which the BEA adjusts for before including that in the NIPA data (see the National Income and Product Accounts Handbook, Chapter 7 (22 pp pdf), for details), and furthermore, some of that inventory does not move off the “shelf” month to month and hence is not revalued…hence, the quick & dirty trick of deflating inventories with an appropriate index from the current producer price index that we’ve used in the past is faulty, and we know of no easy way to estimate for all the inputs that the BEA uses in computing this change…so while we found that real factories inventories probably rose 0.4% in January, we used the simple deflators from the producer price index to arrive at that conclusion…

using a similar method on February durable goods inventories, which were up by 0.3% while prices were up 0.1%, we’d estimate real durable inventories rose 0.2%, a smaller change than the 0.5% monthly increase seen for durable inventories over the 4th quarter…non durables is more complicated, as producer prices for food and energy inventories must be applied separately…food and beverage inventories, at various stages of processing, fell by 0.4% and 0.2% respectively, and they account for about 20% and 10% of non-durable factories inventories respectively…meanwhile February producer prices for finished foods fell 1.6%, while producer prices for intermediate foods fell 1.9%…thus we could estimate that real food inventories at factories likely rose by at least 1.0%, and possibly by as much as 1.5%…refinery inventories, which now account for less than 15% of non-durable factory inventories, increased by 1.1%, while producer prices for energy goods were up 0.6%; hence real energy goods inventories increased by roughly 0.5%…meanwhile all other non-durable inventories appear to have fallen by less than half a percent, while the price index for nondurable consumer goods less foods and energy rose 0.2%, which would hence suggest at least a 0.2% contraction in real inventories of such non-durable goods…overall, then, real factory inventories appear to have grown at a slower pace in January and February than they did in the 4th quarter, with the caveat that we have certainly mispriced a portion of those inventories for the reasons that we set out in the previous paragraph..

(the above is the synopsis that accompanied my regular sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in receiving my weekly emailing of selected links, most from the aforementioned GGO posts, contact me…)

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