the key reports this past week were the 3rd estimate of 1st quarter GDP, which was released on Wednesday, and the May report on Personal Income and Spending, which was released on Thursday….other reports released this week included the May advance report on durable goods, the two monthly reports on housing sales; the May report on existing home sales from the National Association of Realtors (NAR) and the Census Bureau report on new home sales for May, and the Chicago Fed National Activity Index for May, a weighted composite index of 85 different economic metrics which rose to −0.17 in May, up from −0.19 in April., while the index for April was revised from −0.15 to−0.19…that index is constructed such that a zero value indicates economic growth at the historical trend rate, so the negative readings for April and May indicate growth below trend…the week also saw the release of two regional Fed manufacturing indexes for June: the Kansas City Fed manufacturing survey, covering a region that includes western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, reported its broadest composite index rose to -9 in June, up from -13 in May, but down from -7 in April, indicating a ongoing regional contraction, mostly in the energy industry, and the Richmond Fed 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 rose to 6, following last month’s reading of 1, indicating a return to modest grow after several sluggish months…
3rd Estimate of 1st Quarter GDP Shows Contraction at a 0.2% Rate
the Third Estimate of 1st Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services contracted at a 0.2% annual rate in the 1st quarter, revised from the 0.7% contraction rate reported in the second estimate last month, as fixed investments, exports, and government outlays decreased less than previously estimated, while personal consumption expenditures (PCE) and imports increased more than was reported last month…the GDP deflator, or inflation adjustment, was also revised, from a negative 0.18% to a negative 0.04%, which is reported as unchanged, and as a result current dollar GDP also shrunk at the same 0.2% rate as real GDP did, falling from what would be $17,703.7 billion a year in the 4th quarter to $17,693.3 billion annually in the 1st quarter…although this 3rd estimate is usually thought of as the final reading on the quarter’s GDP, it will again be subject to revision on July 30th with the Annual Revision of the National Income and Product Accounts which will be released at that time..
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 data or the change in it 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 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 on this estimate comes from the pdf for the 3rd estimate of 1st quarter GDP, which is linked to on the sidebar of the BEA press release…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, table 4, which shows the change in the price indexes for each of the components, and table 5, which shows the quantity indexes for each of the components, which are used to convert current dollar figures into units of output represented by chained dollar amounts…for comparison purposes, the pdf for the 2nd estimate is here..
real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 2.1% annual rate rather than the 1.8% growth rate reported last month, and since the 1st quarter deflator for PCE was negative 2.0%, that means personal spending in current dollars increased at a 0.1% rate rather than decreased….consumption of real durable goods rose at a 1.3% annual rate, which was revised from a 1.1% rate in the 2nd estimate, and added 0.10 percentage points to GDP, as real output of automotive products consumed fell at a 4.1% rate and offset 4.0% growth in recreational goods and vehicles…real consumption of nondurable goods rose at a 0.8% annual rate, revised from the 0.1% increase reported in the 2nd estimate, and added 0.12 percentage points to 1st quarter growth, as real consumption of food and clothing both decreased, offsetting a 5.7% increase in consumption of gasoline & other fuel…in addition, real consumption of services rose at a 2.7% annual rate, revised from the 2.5% rate reported last month, and added 1.21 percentage points to the final GDP tally…almost all of that was in the increases posted by real consumption of health care and utilities in the colder than normal winter, while recreation services, consumption expenditures of nonprofit institutions serving households, and ‘other’ consumer services all shrunk during the quarter..
in part due to the upward revision of real private inventories, seasonally adjusted real gross private domestic investment grew at a 2.4% annual rate in the 1st quarter, revised from the 0.7% growth estimate made last month, while the contraction in private fixed investment was revised from -1.3% to -0.3% and hence only subtracted 0.05 percentage points from the quarter’s growth rate, rather than 0.21 percentage points subtraction estimated last month…real non-residential fixed investment fell at a 2.0% rate, rather than the 2.8% decrease previously estimated, as the contraction in investment in non-residential structures was revised up from a drop at a 20.8% rate to a drop at a 18.8% rate, which was still largely due to a near 50% pullback in oilfield drilling over the quarter; by itself, that decrease in structures subtracted 0.60 percentage points from the 1st quarter change in GDP…meanwhile, investment in equipment grew at a 2.6% rate, revised from the 2.7% rate previously reported, while growth in investment in intellectual property products was revised up, from growth at a 3.6% rate to growth at a 4.9% rate…growth in residential investment was also revised up from a 5.0% rate to 6.5% growth…after those revisions, investment in equipment added 0.15 percentage points to the 1st quarter growth rate, investment in intellectual property added 0.19 percentage points, while growth in residential investment added 0.21 percentage points to 1st quarter GDP…
meanwhile, real private inventories were revised from the $95.0 billion real growth rate estimated last month to now show inventory growth at an inflation adjusted $99.5 billion rate, which comes after inventories had grown at a $80.0 billion rate in the 4th quarter…hence the $19.5 billion greater inventory growth added 0.45 percentage points to the 1st quarter’s growth rate, in contrast to the 0.33 percentage point addition from inventory growth that was reported in the 2nd estimate…since inventories indicate that some of the goods produced goods during the quarter are still sitting on the shelf, their increase by $19.5 billion means real final sales of GDP were lower by that much, and hence decreased at a 0.6% annual rate in this report, revised from the real final sales decrease at a 1.1% annual rate that was reported with the lower GDP estimate of last month….
the previously reported decrease in real exports was revised lower while the increase in real imports was revised higher by nearly the same amount, and hence the impact from trade figures was little changed in the revision; remember, our exports are added 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 elsewhere), while increased imports subtract from GDP because they represent either consumption or investment that was added to another GDP component that shouldn’t have been because it was not produced here….our real exports fell at a 5.9% rate rather than the 7.6% contraction reported in the 2nd estimate, but still subtracted 0.79 percentage points from 1st quarter GDP growth, down from 1.03 percentage points in the previous estimate…. meanwhile, the real growth rate of our imports was revised to 7.1% from the previously reported 5.6% growth rate and subtracted 1.10 percentage points from the quarter’s growth rate, an increase from the 0.87.percentage points subtracted in the 2nd estimate…hence the 1.89 percentage points subtracted as a result of our increased trade imbalance were greater than the additions in the other GDP components, and were largely responsible for the 0.2% contraction in 1st quarter GDP reported here…
finally, there were also minor revisions to real government consumption and investment in this 3rd estimate…real federal government consumption and investment was revised to unchanged from the 0.1% growth rate reported in the 2nd estimate, and hence added nothing to 1st quarter GDP…real federal spending for defense was revised to show contraction at a 1.2% rate rather than the 1.0% contraction previously reported, while all other federal consumption and investment grew at a 2.0% rate, which was unrevised from last month…the contraction in real state and local outlays, on the other hand, was revised lower, from the 1.8% shrinkage rate previously reported to contraction at a 1.0% rate, which subtracted 0.12 percentage points from GDP, down from the 0.21 percentage point subtraction indicated by the 2nd estimate..
Estimating the Contribution of May Personal Consumption to 2nd Quarter GDP
the key monthly release in determining the trajectory of GDP is the report on Personal Income and Outlays from the Bureau of Economic Analysis, which gives 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 our spending indicated…this report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate…however, the change reported for each of those are not the current monthly change; rather, they’re seasonally adjusted and at an annual rate, ie, in today’s case they tell us what income and spending would be for a year if May’s adjusted income and spending were extrapolated over an entire year…however, the percentage changes are computed monthly, and in this case of this month’s report they give us the percentage change in each annual metric from April to May..
thus, when the opening line of the press release for this report tell us “Personal income increased $79.0 billion, or 0.5 percent, and disposable personal income (DPI) increased $65.5 billion, or 0.5 percent, in May“, they mean that the annualized figure for all types of personal income in May, $15,307.0 billion, was $79.0 billion or 0.5% greater than the annualized personal income figure for April; the actual May increase in personal income over April is not given…similarly, disposable personal income, which is income after taxes, rose by 0.5%, from an annual rate of $13,363.8 billion in April to an annual rate of $13,429.3 billion in May…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, which is the document we’re referencing…so when the press release says, “Wages and salaries increased $37.1 billion in May” that really means wages and salaries would rise by $37.1 billion over an entire year if May’s seasonally adjusted increase were extrapolated over an entire year, just as proprietor’s income rose at a $10.5 billion annual rate and interest and dividend income rose at a $22.8 billion annual rate over the month…so you can see what’s written in the press release is confusing, and often leads to misreporting the data the same way the BEA describes it…..
for the May personal consumption expenditures (PCE) that will be included in 2nd quarter GDP, BEA reports that they increased by $105.9 billion, or 0.9%, which means the annual rate of PCE rose from $12,189.2 billion in April to $12,295.1 in May; in addition, the April PCE figure was revised up from the originally reported $12,158.9 billion annually…however, 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 from 108.693 in April to 109.032 in May, giving us a month over month inflation rate of 0.31%, which BEA rounds to 0.3%, following the negligible increase in the April PCE price index…applying that inflation adjustment to PCE leaves real PCE up 0.6% in May, following a statistically insignificant increase in April..
however, in estimating the change in PCE that applies to GDP, we have to compare April and May real PCE to the real PCE of the 3 months making up the first quarter…that’s done by applying the monthly PCE price index, from Table 9 in the pdf, to the current dollar values of each month’s annualized PCE; that gives us monthly 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 April’s annualized chained dollar consumption works out to 11,214.7 million and May’s annualized chained dollar consumption is 11,276.9, which we can then compare to the 1st quarter’s annualized chained dollar PCE of 11,177.9 shown in Table 8, which is identical to the inflation adjusted first quarter PCE from table 3 in the first quarter GDP report we just reviewed…since we dont yet know real PCE for June, one method of estimating the 2nd quarter change in real PCE is to average the two months we do have and compare them to the 1st quarter…when we do that, we find that 2nd quarter real PCE has grown at a 2.5% annual rate for the two months we do have; note the math to get that annual rate: (((11,214.7 +11,276.9 ) / 2) / 11,177.9 ) ^ 4 = 1.02452… given that real PCE is about 68% of GDP, we could thus estimate that growth in real PCE would add 1.67 percentage points to 2nd quarter GDP…and that has to be considered the low end estimate; even if June’s PCE is unchanged from May, our equation becomes (((11,214.7 + 2 * 11,276.9 ) / 3) / 11,177.9 ) ^ 4 = 1.02830, meaning PCE growth at a 2.8% annual rate, which would add 1.92 percentage points to 2nd quarter GDP…
Shipments, Inventories and Orders of Durable Goods All Down in May
the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf) from the Census Bureau indicated that new orders for manufactured durable goods fell in May by a seasonally adjusted $4.1 billion or 1.8%, to $228.9 billion, the 3rd drop in the last 4 months, while the 0.5% decrease first reported for April has been revised to a drop of 1.5%…new orders for transportation equipment, down 3.5% to $69,484 million, drove the change, as new orders for commercial aircraft fell 8.9%, but even excluding transportation equipment orders, other new orders were still down 0.4%…the widely watched new new orders for nondefense capital goods fell by $5.2 billion or 6.6% to $74.3 billion, but excluding those aircraft orders, new orders for nondefense capital goods were rose 0.4%…
May’s seasonally adjusted shipments of durable goods, which will input into 2nd quarter GDP after an inflation adjustment, fell $0.2 billion or 0.1 percent to $239.9 billion, the 4th decrease this year; again, that was due to $0.7 billion or 0.9% lower shipments of transportation equipment, with shipments of commercial aircraft off 4.6%; excluding that volatile sector, other shipments of durables rose 0.5%….meanwhile, the value of seasonally adjusted inventories of durable goods, also a GDP contributor, fell for the first time in 24 months, shrinking $0.8 billion or 0.2 percent to $400.6 billion, as the $0.3 billion drop to $129.9 billion in inventories of transportation equipment was only a minor factor…finally, unfilled orders for manufactured durable goods, which we consider a better measure of industry conditions than the widely watched but volatile new orders, fell by $5.7 billion or 0.5 percent to $1,195.5 billion, the 5th monthly decrease in the past 6 months, as a 0.6% decrease to $798,770 million in the large order book of the transportation sector accounted for more than half the decrease, as unfilled orders for nondefense aircraft fell 0.7% to $608,477 million…nonetheless, unfilled orders for durable goods remained 5.7% higher than they were last May, with only defense durables, machinery and primary metals manufacturers seeing a year over year decrease in their order backlog, with the latter probably due to lower metal prices…
Existing Homes Sales and Prices Rise 5% in May
the National Association of Realtors (NAR) reported that existing home sales rose a seasonally adjusted 5.1% in May, projecting that 5.35 million homes would sell over a year if May sales were extrapolated over an entire year, a rate 9.2% higher than the annual rate projected in May of a year ago… the NAR press release, which is titled Existing-Home Sales Bounce Back Strongly in May as First-time Buyers Return, is in easy to read plain English, so there’s no point in our restating what they already report; note though, that at 32%, the percentage of first time home buyers is still well below the 40% pre-housing bust norm…also, since the report is entirely seasonally adjusted and at a fairly meaningless annual rate, we’ll take a look at the raw data overview (pdf), which shows that 497,000 homes actually sold in May, up 9.9% from 449,000 in April (which was revised from 445,000) and up 5.1% from the 473,000 homes that sold in May last year, ranging from an increase of 4.6% to 113,000 home sales in the West to a 20.2% increase to 125,000 home sales in the Midwest….that same pdf indicates that the median home selling price for all housing types was $228,700 in May, up from $218,700 in April, and 7.9% higher than the $212,000 median home sales price in May of last year, while the average home sales price was $272,800, up 3.2% from the $256,300 average in April, and up 5.2% from the $259,400 average home sales price of May a year ago…for additional coverage of this report, Bill McBride has two posts with graphs: Existing Home Sales in May: 5.35 million SAAR, Inventory up 1.8% Year-over-year and A Few Random Comments on May Existing Home Sales
New Homes Selling at Annual Rate of 546,000 in May, Give or Take 91,000
the Census report on New Residential Sales for May (pdf) estimated that new single family homes were selling at a seasonally adjusted rate of 546,000 new home sales a year, 2.2 percent (±16.7%)* above the revised April rate of 534,000 new single family homes a year, and 19.5 percent (±19.7%)* above the annual rate that new homes were selling at in May of last year…as you know, the asterisks indicate that based on their small sampling, Census could not be certain whether May new home sales rose or fell from those of April or from those of May a year ago, and the figures in parenthesis represent the 90% confidence range for reported data in this report, which has the largest margin of error of any census construction series…the unadjusted data from Census field reps estimated that 51,000 new homes sold in May, unchanged from April’s 51,000, which was revised up from 49,000 reported a month ago….the raw Census data further estimated that the median sales price of new houses sold was $282,800, down from $291,100 in April, while the average sales price was $337,000, up from $333,900 last month, as the number of homes selling for more than $750,000 rose from ~1,000 to ~2,000…. a seasonally adjusted estimate of 206,000 new houses remained for sale at the end of May , which represents a 4.5 month supply at the May sales rate…for more details and graphics about this report, see Bill McBride’s two posts, New Home Sales increased to 546,000 Annual Rate in May and Comments on New Home Sales and Prices..
(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…)