4th quarter GDP revision, January income and outlays, construction spending, and durable goods

the key economic releases of the past week were the 2nd estimate of 4th quarter GDP and the January report on Personal Income and Spending from the Bureau of Economic Analysis; other widely watched releases included the advance report on durable goods for January and the January report on Construction Spending, both from the Census bureau….this week also saw the release of the last two regional Fed manufacturing surveys for February: the Dallas Fed Texas Manufacturing Outlook Survey reported their general business activity composite index rose to +24.5 from last month’s +22.1, an 11 year high, suggesting a boom like expansion in the Texas oil patch economy, while 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 +17 in February from +12 in January, also suggesting an accelerating expansion in that region’s manufacturing…

privately issued reports released this week included the light vehicle sales report for February from Wards Automotive, which estimated that vehicles sold at a 17.47 rate in February, virtually unchanged from the 17.48 million annual rate in January, and also little changed from the 17.43 million annual sales rate in February a year ago; the Case-Shiller Home Price Index for December from S&P Case-Shiller, which reported that home prices nationally during October, November and December averaged 5.8% higher than prices for the same homes that sold during the same 3 month period a year earlier, and both of the widely followed purchasing manager’s surveys from the Institute for Supply Management (ISM): the February Manufacturing Report On Business indicated that the manufacturing PMI (Purchasing Managers Index) rose to 57.7% in February, up from 56.0 in January,  which suggests a stronger expansion in manufacturing firms nationally, and the February Non-Manufacturing Report On Business; which saw the NMI (non-manufacturing index) rise to 57.6%, up from 56.5% in January, indicating a larger plurality of service industry purchasing managers reported expansion in various facets of their business in February…both of those ISM reports are easy to read and include anecdotal comments from purchasing managers from the 34 business types who participate in those surveys nationally… 

4th Quarter GDP Growth Remains at a 1.9% Rate

the Second Estimate of our 4th Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 1.9% rate in the 4th quarter, unrevised from the advance estimate reported last month, as personal consumption expenditures were greater than initially estimated, but both private and state and local investment grew less than was first estimated…..in current dollars, our fourth quarter GDP grew at a 3.9% annual rate, increasing from what would work out to be a $18,675.3 billion a year output rate in the 3rd quarter to a $18,855.5 billion annual rate in the 4th quarter, with the headline 1.9% annualized rate of increase in real output arrived at after an annualized inflation adjustment averaging 2.0%, aka the GDP deflator, was applied to the current dollar change…

while we cover the details below, remember that the press release for the 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 which 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 artificial 2009 dollar figures, which we think would be better thought of as representing quantity indexes…for our purposes, all the data that we’ll use in reporting the changes here comes directly from the pdf for the 2nd estimate of 4th quarter GDP, which we find 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…the pdf for the 4th quarter advance estimate, which this estimate revises, is here… 

real personal consumption expenditures (PCE), the largest component of GDP, were revised to show growth at a 3.0% annual rate in the 4th quarter, up from the 2.5% growth rate reported last month…that growth rate was arrived at by deflating the annualized dollar amount of consumer spending with the PCE price index, which indicated consumer inflation at a 1.9% annual rate in the 4th quarter, which was revised from the 2.0% inflation rate that was applied to PCE in the first estimate…real consumption of durable goods grew at a 11.5% annual rate, which was revised from the 10.9% growth indicated in the advance report, and added 0.83  percentage points to GDP, as real output of motor vehicles rose at a 16.0% annual rate and accounted for 0.39 of that growth…..real consumption of nondurable goods by individuals rose at a 2.8% annual rate, revised from the 2.3% increase reported in the 1st estimate, and added 0.40 percentage points to 4th quarter economic growth, as lower consumption of energy goods was the only drag on the quarter’s non-durables growth…in addition, consumption of services rose at a 1.8% annual rate, revised from the 1.3% rate reported last month, and added 0.81 percentage points to the final GDP tally, as an increase in the real output of health care services at a 5.8% rate accounted for three-fourths of the 4th quarter increase in services…

seasonally adjusted real gross private domestic investment grew at a 9.2% annual rate in the 4th quarter, revised from the 10.7% growth estimate made last month, as real private fixed investment was revised from growth at a 4.2% rate to growth at a 3.2% rate, while real inventory growth was smaller than previously estimated…investment in non-residential structures was revised from shrinking at rate of 5.0% to shrinking at a 4.5% rate, while real investment in equipment was revised to show growth at a 1.9% rate, revised from the 3.1% growth rate previously reported…in addition, the 4th quarter’s investment in intellectual property products was revised from growth at a 6.4% rate to growth at a 4.5% rate, and the growth rate of residential investment was revised from 10.2% to 9.6% annually…after those revisions, the decrease in investment in non-residential structures subtracted 0.12 percentage points from the economy’s growth rate, investment in equipment added 0.11 percentage points, investment in intellectual property added 0.18 percentage points , and growth in residential investment added 0.35 percentage points to the change in 4th quarter GDP…

meanwhile, the growth in real private inventories was revised from the originally reported $48.7 billion in inflation adjusted growth to show inventory growth at an inflation adjusted $46.2 billion rate, which came after inventories had grown at an inflation adjusted $7.1 billion rate in the 3rd quarter, and hence the $39.1 billion positive change in real inventory growth from the 3rd quarter added 0.94 percentage points from the 4th quarter’s growth rate, revised from the 1.00 percentage point addition from inventory growth reported in the advance estimate….since growth in inventories indicates that more of the goods produced during the quarter were left in a warehouse or sitting on the shelf, their increase by $39.1 billion meant that real final sales of GDP were actually smaller by that much, and hence real final sales of GDP grew at a 0.9% rate in the 4th quarter, which was statistically unchanged from the advance estimate, compared to the real final sales increase at a 3.0% rate in the 3rd quarter, when the change in inventories was smaller….

the previously reported decrease in real exports was revised lower with this estimate, but the reported increase in real imports was revised higher, and as a result our net trade was little changed from what was previously reported…our real exports fell at a 4.0% rate rather than the 4.3% rate reported in the first estimate, and since exports are added to GDP because they are part of our production that was not consumed or added to investment in our country, their shrinkage subtracted 0.50 percentage points from the 4th quarter’s growth rate….meanwhile, the previously reported 8.3% increase in our real imports was revised to an 8.5% increase, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their growth subtracted 1.20 percentage points from 4th quarter GDP….thus, our weakening trade balance subtracted a net 1.70 percentage points from 4th quarter GDP, the same GDP subtraction resulting from foreign trade that was indicated in the advance estimate..

finally, there was also a downward revision to real government consumption and investment in this 2nd estimate, as the real growth rate for the entire government sector went from a 1.2% rate to a 0.4% rate…real federal government consumption and investment was statistically unchanged, however, as real federal spending for defense shrunk at a 3.4% rate and subtracted 0.14% percentage points from 4th quarter GDP, while all other federal consumption and investment grew at a 2.3% rate and added 0.06 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 those goods or services…meanwhile, real state and local consumption and investment was revised from growth at a 2.6% rate in the first estimate to growth at a 1.3% rate in this estimate, as state and local investment spending grew at a 7.7 rate and added 0.14 percentage points to 4th quarter GDP, while state and local consumption spending was little changed and had no statistical impact on GDP…

our FRED bar graph for GDP below has been updated to reflect these latest GDP revisions…each color coded bar shows the real inflation adjusted change, expressed in billions of chained 2009 dollars, in one of the major components of GDP over each quarter since the beginning of 2013…in each quarterly grouping of seven bars on this graph, the quarterly changes in real 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 real 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 therefore 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, they’ll appear below the zero line…..it’s clear that the drop in exports and the surge in imports were the major negatives in the 4th quarter, and that with the increases in personal consumption expenditures, investment and inventories, the 4th quarter could have topped the third had our trade deficit merely remained flat..

4th quarter 2016 GDP 2nd estimate

Personal Income up 0.4% in January, Personal Spending up 0.2%, PCE Price Index up 0.4%

as you can see from the GDP chart above, our personal consumption expenditures (PCE) in blue are usually the key metric for determining the ultimate trajectory of GDP each quarter, and hence the key monthly release that inputs into GDP each quarter would be 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) and the monthly 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, because this report feeds in to GDP and other national accounts data, 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 January’s case they tell us what income and spending would be for a year if January’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 December to January…

thus, when the opening line of the press release for this report tell us “Personal income increased $63.0 billion (0.4 percent) in January“, they mean that the annualized figure for personal income in January, $16,370.8 billion, was $63.0 billion, or a bit less than 0.4% greater than the annualized  personal income figure of $16,307.8 billion for December; the actual change in personal income from December to January is not given…similarly, annualized disposable personal income, which is income after taxes, rose by almost 0.3%, from an annual rate of an annual rate of $14,305.3 billion in December to an annual rate of $14,345.4 billion in January…the monthly contributors to the increase in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also annualized…in January, the largest contributors to the $63.0 billion annual rate of increase in personal income were a $33.7 billion increase in wages and salaries and a $11.4 billion increase in proprietors’ income….

for the January personal consumption expenditures (PCE) that will be included in 1st quarter GDP, BEA reports that they increased by $22.2 billion, or 0.2%, which means the rate of personal consumption expenditures rose from $13,043.5 billion annually in December to $13,065.8 billion annually in January; at the same time, the December PCE figure was revised up from the originally reported $13,032.1 billion annually, a revision that was already incorporated into this week’s GDP estimate…and as you know, before January’s personal consumption expenditures are used in the 1st quarter 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 Table 9 in the pdf for this report, which is a chained price index based on 2009 prices = 100….that PCE price index rose from 111.598 in December to 109.956 in January, giving us a month over month inflation rate of 0.434%, which BEA rounds to a 0.4% increase in reporting it here….applying that 0.434% inflation adjustment to the smaller increase in January PCE means that real PCE actually fell by 0.2616% in January, which the BEA reports as a 0.3% decrease…comparing the annualized January real PCE of 11,657.5 in chained 2009 dollars that we get from from Table 7 of this release to the annualized real PCE of 11,655.0 in chained dollars that was reported in table 3 of the 4th quarter GDP revision, we find that real PCE is barely growing at a 0.02% annual rate so far in the 1st quarter, or at a pace that would be considered statistically unchanged, and thus would add nothing to the growth of 1st quarter GDP…

with our disposable personal income up by 0.3% and our personal consumption expenditures up by 0.2%, there was thus an increase in our personal savings rate for January from a month earlier…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 which came in at a $13,549.7 billion annual rate in January, and subtracts that from the annual rate of disposable personal income, to show personal savings growing at a $795.7 billion annual rate in January, up from the $779.5 billion that we would have ‘saved”’ over a year at December’s savings pace…this small increase left the personal savings rate, or personal savings as a percentage of disposable personal income, at 5.5% in January, up from the savings rate of 5.4% in December…

Construction Spending Fell 1.0% in January after December and November Revised Higher

the Census Bureau’s report on January construction spending (pdf)  estimated that January’s seasonally adjusted construction spending would work out to $1,180.3 billion annually if extrapolated over an entire year, which was 1.0 percent (±1.0%)* below the revised annualized estimate of $1,192.2 billion for construction spending in December but 3.1 percent (±1.5%) above the estimated annualized level of construction spending of January last year…the December spending estimate was revised 0.9% higher, from $1,181.5 billion to $1,192.2 billion, while November’s construction spending was revised from $1,184.4 billion to $1,191.5 billion, which together would suggest an upward revision of 0.16 percentage points to 4th quarter GDP when the third estimate is released at the end of March…

private construction spending was at a seasonally adjusted annual rate of $911.6 billion in January, 0.2 percent (±0.8 percent)* above the revised December estimate, with residential spending of $476.4 billion up 0.5% (±1.3 percent)* from the upwardly revised annual rate of $433.1 billion in December, while private non-residential construction spending of $435.3 billion was statistically unchanged  (±0.8 percent)* from the revised December estimate of $435.4 billion….meanwhile, public construction spending was estimated to be at an annual rate of $268.7 billion, 5.0 percent (±1.8%) below the revised December estimate, with spending for water utilities down 12.1% (±8.7%) to an annual rate of $10,368 million and spending for public safety down 16.8% (±2.3%) to an annual rate of $7,181 million…

construction spending inputs into 3 subcomponents of GDP; investment in private non-residential structures, investment in residential structures, and into government investment outlays, for both state and local and Federal governments…. however, gauging the impact of the January spending that’s reported here on GDP is difficult because all figures given here are nominal and as you know, data used to compute the change in GDP must be adjusted for changes in price…moreover, 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, making an accurate estimate a real chore to undertake manually…so in lieu of trying to adjust for all of those indices, we’ve opted to just use the producer price index for final demand construction as an inexact shortcut to make the needed price adjustment…

that index showed that aggregate construction costs were up 0.3% in January, after they had fallen 0.1% in December and increased by 0.1% in November…on that basis, we can estimate that January construction costs were roughly 0.2% more than those of November, and 0.3% more than October…we then use those percentages to inflate lower priced spending figures for each of the 4th quarter  months, which is arithmetically the same as deflating January construction spending, for purposes of comparison….this report gives annualized construction spending in millions of dollars for the 4th quarter months as $1,192,150 in December, $1,191,468 in November, and $1,173,749 in October…thus to compare January’s nominal construction spending of $1,180,333 million to inflation adjusted figures of the fourth quarter, our formula becomes: (1,180,333 / (((1,192,150 *1.003)+( 1,191,468 * 1.002) + (1,173,749 *1.003)) / 3) = 0.992753, meaning real construction spending in January was down 0.625% vis a vis that of the 4th quarter, or down at a 2.87% annual rate…to figure the potential effect of that change on GDP,  we take the difference between the 4th quarter inflation adjusted average and January’s spending as a fraction of 4th quarter GDP, and find that January construction spending is falling at a rate that would subtract 0.21 percentage points from 4th quarter GDP, if there is no improvement in real constrctuion over the next two months..

January Durable Goods: New Orders Up 1.8%, Shipments Down 0.1%, Inventories Unchanged

the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for January (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods increased by $4.0 billion or 1.8 percent to $230.4 billion in January, after December’s new orders were revised from the  $227.0 billion reported last month to $226.3 billion, now 0.8% less than November’s new orders…January’s new orders were also up by 1.4% from those of January 2016…the volatile monthly new orders for transportation equipment were responsible for the increase, as new transportation equipment orders rose $4.3 billion or 6.0 percent to $76.4 billion, on a 69.9% increase to $7,978 million in new orders for commercial aircraft….excluding orders for transportation equipment, new orders fell 0.2%, while excluding just new orders for defense equipment, new orders rose 1.5%…. at the same time, new orders for nondefense capital goods less aircraft, a proxy for equipment investment, fell $237 million or 0.4% to $64,573 million…

meanwhile, the seasonally adjusted value of January shipments of durable goods, which will included as inputs into various components of 1st quarter GDP after adjusting for changes in prices, decreased by $0.2 billion or 0.1 percent to $238.3 billion, after the value of December shipments was revised from from $238.0 billion to $238.564 billion, now up 1.6% from November…lower shipments of machinery drove the January decrease, falling $0.5 billion or 1.6 percent to $30.7 billion…at the same time, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose by just $0.1 billion to $383.8 billion, after December inventories were revised from $384.351 billion to $383.742 billion, now down 0.1% from November….a $0.27 billion or 2.4 percent increase to $11,269 billion in inventories of defense aircraft was the largest inventory increase, while a $0.56 billion or 1.6 percent decrease to $34 billion in inventories of motor vehicles was the largest decrease…

finally, unfilled orders for manufactured durable goods, which are probably a better measure of industry conditions than the widely watched but obviously volatile new orders, fell for the seventh time in 8 months, decreasing by $4.0 billion or 0.4 percent to $1,114.3 billion, following a December decrease of 0.7% to $1,118.3 billion, which was revised from the previously reported 0.6% decrease to $1,119.4 billion…a $5.6 billion or 0.7 percent drop to $752.9 billion in unfilled orders for transportation equipment was responsible for the decrease, as unfilled orders excluding transportation equipment orders were up 0.4% to $361,417 million…the unfilled order book for durable goods is now 2.0% below the level of last January, with unfilled orders for transportation equipment now 3.9% below their year ago level, mostly on a 4.5% decrease in the backlog of orders for motor vehicles…    

 

(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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