3rd quarter GDP; September Income and Outlays, durable goods, & new home sales; August Case-Shiller

the key reports this past week were the advance estimate of 3rd quarter GDP from the Bureau of Economic Analysis, which was released on Thursday, and the September report on Personal Income and Spending, also from the BEA, which was released on Friday… other widely watched reports included the September advance report on durable goods and the September report on new home sales, both from the Census bureau, and the August Case-Shiller Home Price Index, which is actually a 3 month average of June, July and August home prices…the week also saw the 3rd Quarter Employment Cost Index, which indicated that seasonally adjusted employment costs rose 0.6% over the summer, as wages and salaries rose 0.6% and benefits rose 0.5%, and the last two regional Fed manufacturing surveys for October: the Richmond Fed Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported its broadest composite index rose to -1, following last month’s reading of -5, indicating an ongoing stagnation in the region’s manufacturing, and the Dallas Fed Texas Manufacturing Outlook Survey, which reported its general business activity composite index at -12.7, down from last month’s -9.5, the tenth negative reading this year, the result of an going recession in the Texas oil patch economy…we also saw the private release of the Chicago Purchasing Managers Index (PMI) for October, which reported their Chicago Business Barometer increased 7.5 points to 56.2 in October from 48.7 in September, in a manufacturing diffusion index where readings over 50 indicate that a plurality of area purchasing managers saw growth in various facets of their business…

3rd Quarter GDP Growth Falls to 1.5% Rate on Halving of Inventory Growth

the economy grew at a 1.5% rate in the 3rd quarter as growth in personal consumption, fixed investment, exports and government investment weakened, the increase in private inventories was halved, while growth in government consumption and slower growth in imports were the only positive changes…the Advance Estimate of 3rd Quarter GDP from the Bureau of Economic Analysis estimated that the real output of goods and services produced in the US grew at a 1.5% annual rate over the output of the 2nd quarter of this year, when our real output grew at a 3.9% real rate…in current dollars, our third quarter GDP grew at a 2.7% annual rate, increasing from what would work out to be a $17,913.7 billion a year rate in the 2nd quarter to a $18,034.8 billion annual rate in the 3rd quarter, with the headline 1.5% annualized rate of increase in real output arrived at after an annualized inflation adjustment of 1.2%, aka the GDP deflator, was applied to the current dollar change… 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 +/-0.7% in either direction for nominal GDP, and +/- 0.6% for real (inflation adjusted) GDP before the third estimate for the quarter is released, which will be two months from now…also note that September construction and inventory data have yet to be reported, and that BEA assumed a decrease in nondurable manufacturing inventories, a decrease in wholesale and retail inventories, a decrease in nonresidential construction, and an increase in residential construction in September…

while we look at how the details shook out, 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 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 unreal 2009 dollar figures, which we think would be better thought of as representing quantity indexes…given the misunderstanding evoked by the text of the press release, all the data that we’ll use in reporting here comes from the pdf for the 1st estimate of 3rd 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 (inflation adjusted) 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…

personal consumption expenditures (PCE), which accounts for over 68% of GDP, grew at a 4.5% rate in current dollars in the 3rd quarter, but once the inflation adjustment was made with the quarterly annualized PCE price index of 1.2%, we find real PCE grew at a 3.2% rate in the 3rd quarter, after rising at a 3.6% rate in the 2nd quarter…after 3rd quarter consumer spending for durable goods was adjusted for a 2.2% decrease in durable goods prices, real growth in output of consumer durables was shown to be at a 4.5% annual rate, as real consumption of motor vehicles and parts led the sector with a 6.7% growth rate…real output of consumer non-durable goods grew at a 6.7% rate after consumer spending for non-durables was adjusted for a 0.8% increase in prices, with most of that growth coming from output of non-durable goods other than food, clothing, and fuel, which were little changed over the quarter…meanwhile, the 4.6% growth in consumer outlays for services was reduced with the 1.9% increase in prices for services to show real output of consumer services grew at a 2.6% annual rate, led by a 5.6% growth rate in transportation services and a 3.9% growth rate in health care services…thus, with real growth in all the components of personal consumption expenditures, real growth in output of consumer durable goods added 0. 48 percentage points to the change in GDP, real growth in non-durable goods output for consumers added 0.51 percentage points to 3rd quarter GDP growth, and real growth in services provided to consumers added 1.20 percentage points to the change in 3rd quarter GDP…

the change in 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 5.0% annual rate in the 2nd quarter, shrunk at a 5.6% annual rate in the 3rd quarter; however, most of that decrease in investment growth in the 3rd quarter came from slower growth of inventories, as real growth in fixed investment rose at a 2.9% annual rate, albeit still down from the 5.2% growth rate of the 2nd quarter…of 3rd quarter fixed investment, real non-residential fixed investment grew at a 2.1% rate as real investment in non-residential structures fell at a 4.0% rate and subtracted 0.11 percentage points from 3rd quarter GDP; real investment in equipment grew at a 5.3% rate and added 0.31 percentage points to GDP, and real investment in intellectual property grew at 1.8% rate and added 0.07 percentage points to GDP…in addition, real residential investment grew at a 6.1% rate in the 3rd quarter, down from the 9.3% growth it saw in the 2nd quarter, and added 0.20 percentage points to GDP…for an easy to read table as to what’s included in each of those GDP investment categories, see the NIPA Handbook, Chapter 6, page 3

as was mentioned, it was slower growth in inventories that reduced investment and hence GDP, as real private inventories grew by an inflation adjusted $56.8 billion in the 3rd quarter, roughly half of the $113.5 billion of inflation adjusted inventory growth we saw in the 2nd quarter, and as a result the $56.8 billion slower inventory growth subtracted 1.44% from the 3rd quarter’s growth rate, in contrast to the $0.7 billion increase in inventory growth in the 2nd quarter that added 0.02% to that quarter’s GDP…since slower growth in inventories indicates that less of the goods produced during the quarter were left “sitting on the shelf”, their decrease by $56.8 billion means real final sales of GDP were actually greater by that much, and hence real final sales of GDP rose at a 3.0% rate in the 3rd quarter, compared to the real final sales increase at a 3.9% rate in the 2nd quarter, when the change in inventories was insignificant…

after large adjustments for lower prices, mostly for traded commodities, both real imports and real exports increased at a slower rate than in the 2nd quarter, as our real exports of goods and services rose at a 1.9% rate in the 3rd quarter, after rising at a 5.1% rate in the 2nd quarter, while our real imports rose at a 1.8% rate in the 3rd quarter, after rising at a 3.0% rate in the 2nd quarter…as you’ll recall, increases in 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 increases in 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 and hence not part of our national product…thus the 3rd quarter increase in real exports added .24 percentage points to 3rd quarter GDP,  down from the 0.64 percentage points that exports added to 2nd quarter GDP, while the 1.8% increase in real imports subtracted .27 percentage points from GDP, down from the 0.46 percentage points that imports subtracted in the 2nd quarter…thus, our slightly worse trade balance subtracted a net 0.03% percentage points from 3rd quarter GDP, after an improving trade balance had added 0.18% percentage points in the second quarter…

finally, real consumption and investment by branches of government increased at a 1.7% annual rate in the 3rd quarter after increasing at a 2.6% rate in the 2nd quarter as federal government consumption and investment rose at a 0.2% rate while state and local consumption and investment rose at a 2.6% rate…..inflation adjusted federal spending for defense fell at a 1.4% rate and subtracted 0.06 percentage points from 2nd quarter GDP growth, while real non-defense federal consumption and investment rose at a 2.8% rate and added  0.08 percentage points to GDP…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….meanwhile, state and local government investment and consumption expenditures rose at a 2.6% annual rate and added 0.26 percentage points to the quarter’s growth rate, as real growth in state and local consumption expenditures added 0.17 percentage points and real state and local investment contributed 0.12 percentage points of that GDP addition…

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 our 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 clearly see that the major contribution to GDP growth in the 3rd quarter came as a result of increased real personal consumption, while slower growth in inventories was the major subtraction from growth…

3rd quarter 2015 advance GDP

September Personal Income and Spending Both Up 0.1% as Prices Fall 0.1%

while our personal consumption expenditures (PCE) for September, which were included in the GDP report we just reviewed, are probably the most important metric we get from the monthly 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 one of 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 computed monthly, from one annualized figure to the next, and in this case of this month’s report they give us the percentage change in each annualized metric from August to September, 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 $18.6 billion, or 0.1 percent, and disposable personal income (DPI) increased $19.2 billion, or 0.1 percent, in September“, they mean that the annualized figure for personal income in September, $15,421.7 billion, was $18.6 billion, or a bit over 0.1% greater than the annualized  personal income figure of $15,403.1 billion for August; the actual change in personal income from August to September is not given…similarly, annualized disposable personal income, which is income after taxes, rose by more than 0.1%, from an annual rate of an annual rate of $13,457.9 billion in August to an annual rate of $13,477.1 billion in September…likewise, 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 decreased $3.7 billion in September” that really means wages and salaries would fall by $3.7 billion over an entire year if September’s seasonally adjusted increase were extrapolated over that year, just as interest and dividend income, the largest contributor to the September income increase, rose at a $5.7 billion annual rate…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, ie, they rose at an annual rate of $15.6 billion to $12,389.2 billion annually in September, or were a bit more than 0.1% higher than the annual rate of $12,373.6 billion of PCE for August…however, when they’re included in the GDP report, the monthly personal consumption expenditures are adjusted with the price index for PCE, the BEA’s chained type price index based on 2009 prices equal to 100, to give us “real” PCE, and hence the change in the output of goods and services produced for consumers….in table 9 of the pdf for this report we see that that price index fell to 109.661 in September, from 109.749 in August, a decrease of 0.08%, which the BEA rounds to 0.1% when reporting it…hence, we find that real personal consumption expenditures, or PCE after the inflation adjustment, rose by 0.21% for the month, which the BEA rounds to a increase of 0.2%….using the same PCE price index, disposable personal income would be adjusted to show that real disposable personal income, or the purchasing power of disposable income, rose by 0.2% in September, after an increase of 0.4% in August..

with disposable personal income and personal consumption expenditures both up by similar small amounts, it only goes to reason that our personal savings for September would be little changed…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 $642.8 billion annual rate in September, up from the $637.3 billion that we would have ‘saved”’ over a year had August’s savings been extrapolated for a year…this brought the personal savings rate, or personal savings as a percentage of disposable personal income, to 4.9% in September, up  from the savings rate of 4.8% in August…

New Orders for Durable Goods Fell 1.2% in September

the value of new orders for durable goods fell for the second month in a row in September while August new orders were revised significantly lower….the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf) from the Census Bureau reported that the widely watched new orders for manufactured durable goods fell by a seasonally adjusted $2.9 billion or 1.2% to $231.1 billion, following a August drop of 3.0% that was revised from the previously reported 2.0% drop, and a July increase of 1.9% that was revised down from the 2.0% increase that was reported last month…year to date new orders remain 4.6% below the orders level of 2014, in part due to falling prices of some durable goods, such as primary metals and fabricated metal products, and in part due to the July 1st shutdown of the Export-Import Bank, the financing vehicle for large export orders…as is usually the case, the volatile monthly change in new orders for transportation equipment drove the headline change, as those orders fell $2.2 billion or 2.9% to $75.514 billion on a 35.7% decrease to $9,168 million in new orders for commercial aircraft, year to date orders for which are now 43.6% lower than a year ago…excluding new orders for transportation equipment, new orders were still down 0.4%, as the important new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, fell 0.3% to $68,585 million, after August orders for such capital goods were revised from down 0.2% to a 1.6% drop…both those cap-ex orders, and orders for new aircraft, have undoubtedly been impacted by the failure of congress to reauthorize the Export-Import bank…

meanwhile, the seasonally adjusted value of September shipments of durable goods, which were inputs into 3rd quarter GDP consumption and investment categories after an inflation adjustment,  increased $0.4 billion, or 0.2 percent, to $242.5 billion after falling 0.5% in August and rising 1.0% in July…shipments of transportation equipment were again a factor in the change, as they rose $478 million or 0.6% to $81,010 million, as automotive shipments rose 1..6%…excluding the volatile transportation equipment sector, other shipments of durable goods were down by $102 million to $161,454 million, less than a 0.1% decrease…meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP factor, fell by $1.3 billion, or 0.3 percent, to $399.4 billion, after decreases of 0.2% in July and August…remember, however, that since prices for industrial commodities less fuel were down 0.5% in September, new real inventories were likely up on the order of 0.2%…inventories of transportation equipment were down 0.8% to $131,324 on a 1.3% reduction in inventories of automotive equipment; without transportation, inventories fell less than 0.1% to $268,045 million…

while we consider unfilled orders for manufactured durable goods a better measure of industry conditions than the widely watched but volatile new orders, they also fell in September, with the order backlog decreasing $6.6 billion or 0.6 percent to $1,187.4 billion, after the drop in August’s unfilled orders was revised from 0.2% to 0.3%…again it was a drop in unfilled orders for commercial aircraft which drove the change, as they fell 0.9% to $607,968, which you’ll note accounts for more than half of the total of durable goods unfilled orders outstanding….without the transportation equipment sector, September unfilled orders still fell by $1116 million to $393,347 million, a 0.3% decrease.. unfilled orders for durable goods are now 2.2% below the year ago level, with the order backlog for nondefense capital goods excluding aircraft now 2.6% lower than a year ago, and only the backlog of orders for computers, communications equipment, and motor vehicles is still higher than their year ago level…

New Home Sales Fell 11.5% in September

the Census report on New Residential Sales for September (pdf) estimated that new single family homes were selling at a seasonally adjusted rate of 468,000 new homes a year, which was 11.5 percent (±11.3%) below the revised August rate of 529,000 new single family homes a year but was 2.0 percent (±17.9%)* above the estimated annual rate that new homes were selling at in September of last year….the asterisk indicates that based on their small sampling, Census could not be certain whether September new home sales rose or fell from those of 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 and subject to the largest revisions of any census construction series….sales new single family homes in August were revised from the annual rate of  552,000 reported last month to a 529,000 a year rate with this report, while the annual rate of July sales was revised from 522,000 to 503,000, and the annual rate of June new home sales was revised from 466,000 to 469,000…

the annual rates of sales reported here are extrapolated from the estimates of Census field reps, which showed that approximately 36,000 new homes sold in September, down from 43,000 new homes sold in August, which was revised from the originally reported 45,000….the unadjusted estimate for July home sales was revised from 44,000 to 43,000, while the estimate for June sales was revised from 43,000 to 44,000….the raw numbers from Census field agents further estimated that the median sales price of new houses sold in September was $296,900, up from $289,100 in August, which was originally reported as $292,700, while the average August new home sales price was $364,100, up from $343,000 in July, and up from the average sales price of $319,100 in September a year ago….a seasonally adjusted estimate of 225,000 new single family houses remained for sale at the end of September, which represents a 5.8 month supply at the September sales rate, up from a 4.7 month supply in August….for more details and graphics on this report, see Bill McBride’s two posts, New Home Sales decreased to 468,000 Annual Rate in September and Comments on September New Home Sales.. 

August Case Shiller National Home Price Index is 4.7% Higher Than a Year Ago

the Case-Shiller house price indexes for August indicated a 4.7% year over year increase in prices on repeat home sales in the ten cities of the original index, a 5.1% annual increase in the 20 City Composite, and a 4.7% increase in home prices nationally since the August report of last year, led by 10.7% increases in home prices in both San Francisco and Denver…they also report a ‘monthly’ increase of 0.3% the 10 city index and in the national index, and a 0.4% increase in the 20 city composite, which compares prices of houses sold in May, June and July to those sold in June, July, and August and hence the change in the month over month indexes are equal to 1/3rd the difference between May home prices and August home prices…seasonally adjusting these so called month over month indexes shows that the national index is 0.4% higher while the 10 and 20 city indices would be up 0.1% from the previous report…thus, while home prices in 18 of the 20 cities showed an increase in August when compared to May, after seasonal adjustments, home prices in 5 cities were down, 11 cities were up, and 4 were unchanged….the full pdf of the release, titled Widespread Gains in Home Prices for August, is here, and it includes full unadjusted and adjusted tables for all 20 cities and the 3 indexes, as well as graphs and commentary…for coverage of this Case-Shiller report on the web, Bill McBride has two thorough posts, which include several graphs: Case-Shiller: National House Price Index increased 4.7% year-over-year in August, followed by his analysis in Real Prices and Price-to-Rent Ratio in August

(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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