2nd estimate of 1st Quarter GDP and April’s Income and Outlays

The key economic releases of the past week were the second estimate of 1st quarter GDP from the Bureau of Economic Analysis and the April report on Personal Income and Spending, also from the BEA, a report which includes source data for more than 23% of 2nd quarter GDP….This week also saw the release of the widely watched March Case-Shiller Home Price Index from S&P Case-Shiller, an index which is computed from the relative average of January, February & March home sales prices as compared to home sales prices of the same homes when they sold in previous 3 month periods; the Case Shiller index indicated that home prices nationally for those 3 months averaged 6.5% higher than prices for the same homes that sold during the same 3 month period a year earlier, same as the year over year increase they reported for their February national index​, covering prices for December, January and February…

In addition, the last two regional Fed manufacturing surveys for May were also released this week: the Richmond Fed Survey of Manufacturing Activity, covering an area that includes Virginia, Maryland, the Carolinas, the District of Columbia and West Virginia, reported that their broadest composite index increased from −7 in April to 0 in May, indicating that the number of Fifth District manufacturing firms reporting deteriorating business conditions in May matched the number reporting improvement; while the Dallas Fed Texas Manufacturing Outlook Survey, covering Texas, western Louisiana and eastern New Mexico, reported their general business activity composite index fell from –14.5 April to -19.4 in May, indicating that a larger majority of Texas businesses reported worsening business metrics during May than in April..

1st Quarter GDP Revised to Show Our Economy Grew at a 1.3% Rate

The Second Estimate of our 1st Quarter GDP from the Bureau of Economic Analysis indicated that our real output of goods and services grew at a 1.3% rate in the 1st quarter, revised from the 1.6% growth rate reported in the advance estimate last month, as downward revisions to growth of real personal consumption expenditures for goods, to inventories, to the federal government and an upward revision to imports, which subtracts from GDP, more than offset upward revisions to growth of fixed investment, to exports​, and to growth of state and local governments….in current dollars, our first quarter GDP grew at a 4.35% annual rate, increasing from what would work out to be a $27,957.0 billion a year output rate in the 4th quarter of last year to a $28,255.9 billion annual rate in the 1st quarter of this year, with the headline 1.3% annualized rate of increase in real output arrived at after weighted annualized inflation adjustments averaging 3.0%, known in aggregate as the GDP deflator, were computed from the price changes of each of the GDP components and applied to their current dollar change…a​ downward revision of that GDP deflator from the 3.1% reported last month boosted GDP by 0.1%…

As we review this month’s revisions, remember that the GDP press release 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 from one 3 month period to the next, and that the prefix “real” is used to indicate that each change has been adjusted for inflation using price changes chained from 2017, and then that all percentage changes in this report are calculated from those 2017 dollar figures, which would be better thought of as quantity indexes than as any reality based dollar amounts…for our purposes, all the data that we’ll use in reporting the changes here comes directly from the Full Release & Tables for the second estimate of 1st quarter GDP, which is linked to on the BEA’s main GDP page…specifically, we’ll be citing data from table 1, which shows the real percentage change in each of the GDP components annually and quarterly since the 2nd quarter of 2020; 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 the inflation adjusted value in 2017 dollars of each of those components; and table 4, which shows the change in the price indexes for each of the GDP components…the full pdf for the 1st quarter advance estimate, which this estimate revises, is here….

Growth of real personal consumption expenditures (PCE), the largest component of GDP, was revised from the 2.5% growth rate reported last month to indicate real PCE grew at a 2.0% rate with this estimate…that real growth rate figure is the result of deflating the 5.39% growth rate in the dollar amount of consumer spending with the PCE price ind​ices, which​ in aggregate indicated consumer goods and services inflation grew at a 3.3% annual rate in the 1st quarter, which was revised from the 3.4% PCE inflation rate published a month ago….real consumption of durable goods shrunk at a 4.1% annual rate, which was revised from the 1.2% contraction rate shown in the advance report, and subtracted 0.42 percentage points from GDP, as a decrease in real consumption of motor vehicles and parts at a 13.4% rate accounted for 80% of the contraction in durables, and more than offset modest growth in the output of furnishings, durable household equipment, and other durable goods….at the same time, real consumption of nondurable goods by individuals shrunk at a 0.6% annual rate, revised from the unchanged nondurables growth figure ​s​hown in the 1st estimate, and subtracted 0.09 percentage points from the 1st quarter’s economic growth, as a decrease in real consumption of gasoline and other energy goods more than offset growth in real consumption of groceries and clothing….meanwhile, consumption of services rose at a 3.9% annual rate, revised from the 4.0% growth rate reported last month, and added 1.49 percentage points to the final GDP tally, as real growth of health care services at a 6.5% rate accounted for around 44% of the quarter’s growth in services….

At the same time, seasonally adjusted real gross private domestic investment grew at a 3.2% annual rate in the 1st quarter, statistically un​c​hanged from the growth rate estimate reported last month, as real private fixed investment grew at a 6.0% rate, rather than at the 5.3% rate reported in the advance estimate, while the negative change in private inventories was somewhat greater than had been previously estimated….real investment in non-residential structures was revised from shrinking at a 0.1% rate to growing at a 0.4% rate, while real investment in equipment was revised to show it grew at a 0.3% rate, revised from the 2.1% growth rate previously reported…at the same time, the first quarter’s investment in intellectual property products was revised from real growth at a 5.4% rate to real growth at a 7.9% rate, while the increase in real residential investment was revised from growth at a 13.9% annual rate to growth at a 15.4% rate….after those revisions, the increase in investment in non-residential structures added 0.01 percentage points to the 1st quarter’s growth rate, and the increase in investment in equipment also added 0.01 percentage points to the quarter’s growth rate, and growth in investment in intellectual property added 0.42 percentage points to the growth rate of 1st quarter GDP, while the jump in residential investment added 0.57 percentage points to the growth of 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….

At the same time, growth in real private inventories was revised from the originally reported $35.4 billion in inflation adjusted growth to show that inventories grew at an inflation adjusted $27.8 billion rate…since that came after inventories had grown at an inflation adjusted $54.9 billion rate in the 4th quarter, the change in real inventory growth from the 4th quarter to the first quarter was revised from a rounded $19.5 billion negative change to a $27.1 billion negative change, and hence subtracted 0.45 percentage points from the 4th quarter’s growth rate, revised from the 0.35 percentage point subtraction from GDP from lower inventory growth reported in the advance estimate….however, since growth in inventories indicates that more of the goods produced during the quarter would have been left in storage or “sitting on the shelf”, the $27.1 billion decrease in their growth conversely means real final sales of GDP were actually greater by that amount, and therefore the BEA found that real final sales of GDP grew at a 1.7% rate in the 1st quarter, revised from the 2.0% real final sales growth rate shown in the advance estimate, while they still were down from the real final sales growth rate of 3.5% in the 4th quarter, when the decrease in inventory growth meant that the quarter’s growth in real final sales was also greater than that of the quarter’s GDP​ growth…

The previously reported increase in real exports was revised higher with this estimate, while the previously reported increase in real imports was revised higher by more, and as a result the previously reported hit to GDP from our net trade was a bit greater in this estimate…our real exports of goods and services grew at a 1.2% rate in the 1st quarter, revised from the 0.9% growth shown in first estimate, and since exports are an addition to GDP because they are that part of our production that was not previously added to consumption or investment in our country, their increase added 0.13 percentage points to the 1st quarter’s growth rate, up from the 0.10 percentage point export addition due to rising exports shown last month…on the other hand, the previously reported 7.2% increase in our real imports was revised to a 7.7% increase, and since imports subtract from GDP because they represent either consumption or investment that was added to GDP with those figures but was not produced in the US, their increase subtracted 1.02 percentage points from 1st quarter GDP, revised from the 0.96 percentage point subtraction​ due to rising imports shown a month ago….thus, our deteriorating trade balance in the first quarter subtracted a net 0.89 percentage points from 1st quarter GDP, revised from the 0.86 percentage point subtraction that had been indicated by the advance estimate..

Finally, there was also a net upward revision to real government consumption and investment in this 2nd estimate, as the entire government sector is now shown to have grown at a 1.3% rate, revised from the 1.2% growth rate for government indicated by the 1st estimate….however, real federal government consumption and investment is now seen to have shrunk at a 0.7% rate from that of the 4th quarter in this estimate, which was revised from the 0.2% contraction rate shown in the 1st estimate, as real federal outlays for defense shrunk at a 1.2% rate, revised from the 0.6% contraction rate shown previously, and subtracted 0.05 percentage points from 1st quarter GDP, while all other federal consumption and investment was unchanged, revised from the 0.3% growth rate shown previously, and didn’t add anything to 1st quarter GDP growth….meanwhile, real state and local consumption and investment grew at a 2.6% rate in the quarter, revised from the 2.0% growth shown in the 1st estimate, and added 0.28 percentage points to 1st quarter GDP, which was revised from the 0.22 percentage point​ addition shown in the advance estimate, as state and local investment grew at a 4.5% rate and accounted for 0.09 percentage points of the state and local addition to GDP….note that 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, thereby indicating an increase in the output of those goods or services…

April Personal Income Up 0.3%, Personal Spending Up 0.2%, PCE Prices Up 0.3%, Savings Rate at 3.6%

Friday’s release of the April report on Personal Income and Outlays from the Bureau of Economic Analysis included the month’s data for our personal consumption expenditures (PCE), which accounts for almost 71% of the month’s GDP, and with it the PCE price index, the inflation gauge the Fed targets, and 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…in addition, this release reported our national totals for personal income, disposable personal income, which is income after taxes, and our national savings rate…however, because this report feeds in to GDP and other national accounts data, the change reported for each of those metrics is not the current monthly change; rather, they’re reporting seasonally adjusted amounts expressed at an annual rate, ie, they tell us how much income and spending would change over a year if April’s change in seasonally adjusted income and spending were extrapolated over an entire year…..

Hence, when the opening line of the news release for this report tell us “Personal income increased $65.3 billion (0.3 percent at a monthly rate) in April“, that means that the annualized figure for seasonally adjusted national personal income in April, $23,823.7 billion, was $65.3 billion, or almost 0.3% more than the annualized personal income figure of $23,758.5 billion extrapolated for March; the actual, unadjusted change in personal income from March to April is not given…at the same time, annualized disposable personal income, which is income after taxes, rose by 0.2%, from an annual rate of $20,806.5 billion in March to an annual rate of $20,846.6 billion in April….the reasons for the annualized $65.3 billion increase in personal income can be viewed in the Full Release & Tables (PDF) for this release, also as annualized amounts, and primarily reflected a $29.8 billion annual rate of increase in income from wages and salaries, a $17.1 billion annualized increase in interest and dividend income, and an increase in government social benefits to persons at a $14.2 billion annual rate…

For the April personal consumption expenditures (PCE) that will be included in 2nd quarter GDP, the BEA reports that they rose at a $39.1 billion annual rate, or by roughly 0.2%, as the annual rate of national PCE increased from $19,301.5 billion in March to $19,340.6 in April….March PCE was revised from $19,350.9 billion annually to $19,301.5 billion, while February PCE was revised from $19,190.0 billion annually to $19,158.4 billion, revisions that were already included in this week’s GDP report….total personal outlays for April, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $42.8 billion to a rate of $20,102.2 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $744.5 billion annual rate in April, down by $2.6 billion from the revised $747.1 billion in annualized personal savings in March…as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, remained at 3.6% in April, matching the lowest personal savings rate since October 2022…

As you know, before those personal consumption expenditures can be 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 a chained price index based on 2017 prices = 100, which is computed from the components ​of PCE by the BEA and included in Table 5 in the pdf for this report….that index rose from 122.761 in March to 123.076 in April, a month over month inflation rate that’s statistically 0.256596%, which BEA reports as an increase of 0.3 percent, following the rounded 0.3% increase in the PCE price index reported for March…applying that 0.2566% April inflation adjustment to the actual nominal change in PCE left real PCE down by 0.053883% in April, which the BEA reports as a 0.1% decrease in their press release and in the tables, after real PCE had risen by a rounded 0.4% in March….note that when those PCE price indexes are applied to a given month’s annualized PCE in current dollars, it yields that month’s annualized real PCE in those familiar chained 2017 dollars, which are the means that the BEA uses to compare the goods and services produced in one month or one quarter to the real goods and services produced in another….that result is shown in table 5 of the PDF, where we see that April’s chained dollar consumption total works out to 15,714.6 billion annually, 0.0534% less than March’s 15,723.0 billion, again a decrease that the BEA reports as –0.1%…

However, to estimate the impact of the change in PCE on the change in GDP, that month over month PCE change doesn’t help us much, since GDP is computed & reported quarterly… thus we have to compare April’s real PCE to the real PCE of all 3 months of the first quarter….while this release reports PCE for all those amounts on a monthly basis, the easiest place to find the quarterly equivalent is in table 3 of the pdf for the 1st quarter GDP report….when we compare April’s chained dollar PCE of 15,714.6 billion to the 1st quarter real PCE of 15,663.8 billion on an annual basis, we find that April’s real PCE has risen at a 1.30% annual rate from that of the 1st quarter….that would mean that even if real PCE does not appreciate during May and June from the April level, growth in real PCE would add 0.90 percentage points to the growth rate of 2nd quarter GDP…

 

 

(the above is the synopsis that accompanied my regular sunday morning news 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 of which are picked from the aforementioned GGO posts, contact me…)