1st quarter GDP, March income and outlays, et al

this week we’ll review the advance report on 1st quarter GDP, which was released on Wednesday, and the March report on Personal Income and Spending, which was released on Thursday…other reports released this week included the S&P/Case-Shiller Home Price Indices for February, which showed national home prices increased 0.1% month over month and 4.2% since a year ago, the first quarter Employment Cost Index, which increased 0.7% from year end, the Census report on Construction Spending for March, which saw private construction spending fall by 0.3 percent (±1.0%)* and public construction spending fall by 1.5 percent (±2.3%)*, the Ward’s Automotive report on light vehicle sales for April, which estimated that vehicle sales were at a seasonally adjusted annual rate of 16.46 million in April, down 3.7% from the 17.05 million sales rate of March but up 4.9% from the sales rate last year, and 4 diffusion indexes for April manufacturing…those included the Texas area manufacturing survey from the Dallas Fed, who saw their general business activity index tick up to –16 from -17.6 in March, still indicating an ongoing recession in Texas area manufacturing, the Richmond Fed November Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, which reported its broadest composite index at −3, following last month’s reading of −8, indicating a mild ongoing contraction, the private Chicago Purchasing Managers Index (PMI) from the ISM-Chicago (pdf) which reported a PMI of 52.3 in April, up from 46.3 in March, and indicating a return to mild expansion after 2 months of contraction, and the national ISM Manufacturing Purchasing Managers Index for April, which was unchanged at a barely expansionary reading of 51.5..

Economy Avoids 1st Quarter Contraction by Building Inventory

the first report on GDP for this year indicated that we eked out marginal growth at a 0.2% annual rate as exports and investment fell, imports and inventories rose, and the increase personal consumption expenditures was the weakest in a year… the Advance Estimate of 1st Quarter GDP from the Bureau of Economic Analysis indicated that the real output of goods and services produced in the US grew at a 0.2% annual rate over the output of the 4th quarter of this year, when our real output grew at a 2.2% real rate…as is always the case with an advance estimate, the BEA cautions that the source data is incomplete and also subject to revisions, which have now averaged +/-0.6% in either direction for nominal GDP, and +/- 0.6% for real (inflation adjusted) GDP before the third estimate is released, which will be two months from now…also note that March trade and inventory data have yet to be reported, and that BEA assumed an increase in imports and in exports, that wholesale and retail inventories had increased and that nondurable manufacturing inventories had decreased in March…

while we cover the details below, remember that the press release for GDP 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 they only use the prefix “real” to indicate that the change has been adjusted for inflation using prices chained from 2009, and then calculate all percentage changes in this report from those nonsense 2009 dollar figures, which we think would be better thought of as a quantity indexes…given the misunderstanding evoked by the press release, all the data that we’ll use in reporting the above comes from the pdf for the 1st estimate of 1st quarter GDP, which is linked to on the sidebar of the BEA press release, which also offer 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 2012, 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, and table 4, which shows the change in the price indexes for each of the components, and which is used to convert current dollar figures into units of output represented by chained dollar amounts…

although personal consumption expenditures, which accounts for over 68% of GDP, fell at nearly a 0.2% rate in current dollars, an inflation adjustment indicating an annualized price decrease of over 2.0% was applied to those, and hence real personal consumption expenditures, which we should think of as representing the quantity of goods and services consumed, rose at a 1.9% annual rate in the 1st quarter and added 1.31 percentage points to the final GDP tally…consumer spending for durable goods fell at a rate of more than 1.7% in the quarter, but durable goods prices fell at a 2.8% rate, so real durable goods produced for consumers rose at a 1.1% rate and added 0.09 percentage points to GDP growth…similarly, spending for non-durable goods fell at an 11.8% rate in the first quarter in current dollars, but an inflation adjustment indicating non-durable prices fell at an annualized 11.5% rate means that the actual quantity of non-durables produced and consumed only fell by 0.3% and subtracted just 0.04 percentage points from the change in GDP…on the other hand, personal outlays for services rose at a 4.3% annual rate in current dollars, but prices for services were increasing at a 1.5% rate, so real services delivered in the quarter really rose at a 2.8% annual rate and added 1.26 percentage points to the change in GDP..

the other components of the change in GDP are computed in the same manner; ie, the actual increase in current dollar spending for the quarter is adjusted with an inflation factor for that component, giving the real units of goods or services produced in the quarter, and then those changes are converted to an annualized figure by compounding them 4 times…hence, real gross private domestic investment, which had grown at a 3.7% annual rate in the 4th quarter, grew at a 2.0% annual rate in the 1st quarter; however, all of that investment growth in the 4th quarter came from a buildup of inventories, as real growth in fixed investment actually fell at a 2.5% annual rate…of that, real non-residential fixed investment fell at a 3.4% rate primarily because real investment in non-residential structures fell at a 23.1% rate; that is most certainly due to a near 50% pullback in the number of drilling rigs in use in the quarter; by itself, that took .75 percentage points off the change in GDP…meanwhile, investment in intellectual property grew at 7.8% rate and added 0.30% as private research and development rose at a 12.4% rate and accounted for 2/3rd of the intellectual property contribution, while investment in equipment rose by just 0.1% as and contributed nothing, statistically, to the change in GDP…in addition, residential investment grew at a 1.3% rate in the 1st quarter, down from the 3.8% growth it saw in the 4th quarter, and added 0.4 percentage points to GDP…for an easy to read table as to what’s included in each of those investment categories, see the NIPA Handbook, Chapter 6, page 3..

as mentioned, it was growth in inventories that bailed out investment and GDP, as real private inventories grew by an inflation adjusted $110.3 billion in the 1st quarter after they grew by an adjusted $80.0 billion in the 4th quarter, and as a result the $30.3 billion greater inventory growth added 0.74% to the 1st quarter’s growth rate, in contrast to the $2.2 billion decrease in inventory growth in the 4th quarter that subtracted 0.10% from that quarter’s GDP…since greater inventories indicate that more of the goods produced goods during the quarter are still ‘sitting on the shelf”, their increase by $30.3 billion means real final sales of GDP were lower by that much, and hence real final sales of GDP fell by 0.5% in the 1st quarter, compared to the real final sales increase at a 2.3% rate in the 4th quarter, when the change in inventories was slightly negative…

although current dollar values of both exports and imports were down significantly, in part due to the west coast dock strike, both had large inflation adjustments, as crude oil & raw material imports and agricultural commodities and refined fuels exports were all priced lower…hence, while the value of our exports fell at a 16.5% annual rate, an inflation adjustment of 10% at an annual rate reduced the real decrease of our goods and services exported to 7.2%, which subtracted .96 percentage points from GDP…meanwhile our imports, which shrunk at an annual rate of 14.9% in dollar terms, were adjusted for import prices that were declining at a 16.4% rate in the quarter, so hence our real imports grew at a rate of 1.8%….as you’ll recall, exports add to gross domestic product because they represent that part of our production that was not consumed or added to investment in our country, while imports subtract from GDP because they represent either consumption or investment that was not produced here, and that it’s the quarter over quarter change in each that affects the quarterly change in GDP…hence the 1.8% increase in real imports subtracted .29 percentage points from GDP, and combined with the .96 point hit from the 7.2% decrease in real exports, meant that the 1st quarter increase in our trade deficit shaved 1.25 percentage points off of GDP, almost as much as the 1.31 percentage points that all of our real personal consumption expenditures added during the quarter…

finally, real consumption and investment by governments decreased at a 0.8% annual rate, even though federal government consumption and investment rose at a 0.3% rate over the quarter, because state and local consumption and investment fell at a 1.5% rate…..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…inflation adjusted federal spending for defense fell at a 0.7% rate and subtracted 0.03 percentage points from GDP growth, while real non-defense federal consumption and investment grew at a 1.9% rate and added 0.05 percentage points to GDP..meanwhile, state and local government investment and consumption expenditures, which fell at a 1.5% annual rate, subtracted 0.17 percentage points from the quarter’s growth rate, as real state and local consumption spending rose at a 0.7% rate while real state and local investment fell at a 11.5% rate

in our FRED bar graph below, each color coded bar shows the real change, in billions of chained 2009 dollars, in one of the major components of GDP over each quarter since the beginning of 2012…in each quarterly grouping of seven bars on this graph, the quarterly changes in real (ie, inflation adjusted) personal consumption expenditures are shown in blue, the changes in real gross private investment, including structures, equipment and intangibles, are shown in red, the quarterly change in private inventories is in yellow, the real change in imports are shown in green, the real change in exports are shown in purple, while the real change in state and local government spending and  investment is shown in pink, and the real change in Federal government spending and investment is shown in grey…those components of GDP 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 to that is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so that 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…you can see the only significant contributions to GDP in the 1st quarter came from personal consumption and inventories, while the other components save the nearly unchanged federal contribution subtracted from growth…

1st qtr 2015 advance GDP

Personal Income Barely Up in March While PCE Rises 0.4%

while personal consumption expenditures (PCE) for March, which were included in the GDP report we just reviewed, are probably the most important metric we get from the March report on Personal Income and Outlays from the BEA, this report also gives us personal income data, disposable personal income, which is income after taxes, our monthly savings rate and the PCE price index, the inflation gauge the Fed targets….it is also probably the least understood and most misreported of the monthly economic reports, which is largely due to the NIPA-related manner in which the press release from the BEA reports on it…to start with, all the dollar amounts referenced by this report are seasonally adjusted and at an annual rate; so the nominal monthly dollar changes, which are not reported, are actually on the order of one twelfth of the reported amounts… however, the percentage changes are expressed as a month over month change and are confusingly used within the report as if they refer to the annualized amounts, making for a difficult report to unpack and report on correctly… 

hence, when the opening line of the press release for this report tell us “Personal income increased $6.2 billion, or less than 0.1 percent, and disposable personal income (DPI) increased $1.6 billion, or less than 0.1 percent in March“, they mean that the annualized figure for personal income in March, $15,133.0 billion, was $6.2 billion (or less than 0.1%) greater than the annualized  personal income figure of $15,126.8 billion for February; while the actual data for personal income in February and March are not given…similarly, annualized disposable personal income, which is income after taxes, rose by less than 0.1%, from an annual rate of an annual rate of $13,315.8 billion in February to an annual rate of 13,317.4 billion in March…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 $16.3 billion in March” that really means wages and salaries would rise by $16.3 billion over an entire year if March’s seasonally adjusted increase were extrapolated over an entire year…so you can see what’s written in this press release is misleading, and often leads to media reports that parrot those lines the same way the BEA wrote it… 

personal consumption expenditures (PCE) are reported in the same manner, such that they rose at an annual rate of $53.4 billion to $12,160.5 billion annually in March, or 0.4%, from the annual rate of $12,107.1 billion in February…however, when used for the GDP report, the monthly personal consumption expenditures are adjusted with the price index for PCE, which is the BEA’s chained type price index based on 2009 prices equal to 100…in table 9 of the pdf for this report we see that that price index rose to 108.646 in March, from 108.460 in February, an increase of 0.17%, which the BEA rounds to 0.2% when reporting on it…hence, we find that real personal consumption expenditures, or PCE after the inflation adjustment, rose by 0.27%, which the BEA rounds to a increase of 0.3%….using the same PCE price index, disposable personal income can be adjusted to show that real disposable personal income, or the purchasing power of disposable income, fell by 0.2% in March, after an increase of 0.3% in February..

with disposable personal income down and personal consumption expenditures up, it only goes to reason that personal savings would have decreased for the month…to arrive at the figures for that, the BEA takes total personal outlays, which is the sum of PCE, personal interest payments, and personal current transfer payments, and subtracts that from disposable personal income, to show personal savings at a $702.6 billion annual rate in March, down from the $758.6 billion that we would have ‘saved”’ in February had February’s savings been extrapolated for a year…this left the personal savings rate, or personal savings as a percentage of disposable personal income, at 5.3% in March, down from the savings rate of 5.7% in February…

(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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