Q2 GDP revision; July’s income and outlays, and durable goods

The key economic reports that were released last week were the 2nd estimate of 2nd quarter GDP and the July report on Personal Income and Spending, both from the Bureau of Economic Analysis…the week also saw the release of the July advance report on durable goods from the Census Bureau, the Case-Shiller house price indexes for June from S&P Case-Shiller, who reported that their national home price index, based on relative April, May and June home sales prices, was 5.4% higher than their home price index based on home sales prices during the same three months of a year ago, and the Chicago Fed National Activity Index (CFNAI) for July, a weighted composite index of 85 different economic metrics, which decreased to –0.34 in July from a revised –0.09 in June, which had previously been reported at +0.05…as a result, the 3 month average of the CFNAI remained at -0.06 in July, which, as a small negative number, would indicate national economic activity has been slightly below the historical trend over those recent months…

In addition, this week saw the release of the last two regional Fed manufacturing surveys for August: 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 slipped from -10 in June and from −17 in July to −19 in August, indicating that a larger majority of that region’s manufacturers reported worse business metrics in August than in those prior months, and the Dallas Fed’s Texas Manufacturing Outlook Survey, which also covers adjacent western Louisiana and southeastern New Mexico, and which indicated their general business activity index rose to -9.7 in August, up from –17.5 in July, and from –15.1 in June, indicating that a smaller majority of Texas businesses continue to experience a slowdown, with the negative figures indicating the percentage of negative reports over those that were positive each month…

2nd Quarter GDP Revised to Show Our Economy Grew at a 3.0% Rate

The Second Estimate of our 2nd Quarter GDP from the Bureau of Economic Analysis indicated that the real output of our goods and services grew at a 3.0% rate during the quarter, revised from the 2.8% growth rate reported in the advance estimate last month, as personal consumption expenditures for goods and services grew more than was previously reported, more than offsetting downward revisions to fixed investment, inventories, net exports, and to government….In current dollars, our second quarter GDP grew at a 5.53% annual rate, increasing from what would work out to be a $28,269.2 billion a year rate in the 1st quarter to a $28,652.3 billion annual rate in the 2nd quarter, with the headline 3.0% annualized rate of increase in real output arrived at after annualized GDP inflation adjustments averaging 2.5% were computed from the price changes of the GDP components and applied to their current dollar change..that composite GDP deflator was revised from 2.3% in the advance estimate to 2.5% with this estimate, and hence the current dollar GDP was actually revised up nearly 0.4% from the advance estimate..

As we review this month’s revisions, remember that the GDP news 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 a 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 pdf for the 2nd estimate of 2nd quarter GDP, which we find linked to on the BEA’s GDP page, which also links to the GDP tables and source data 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 since 2021 and quarterly since the third quarter of 2020, table 2, which shows the contribution of each of the components to the GDP figures for those quarters 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 GDP components…the full pdf for the 2nd quarter advance estimate, which this estimate revises, is here…

Growth of real personal consumption expenditures (PCE), the largest component of GDP by far, was revised from the 2.3% growth rate reported last month to a 2.9% growth rate in this 2nd estimate…that net growth rate figure was arrived at by deflating the 5.49% growth rate in the dollar amount of consumer spending with the PCE price index, which indicated dollar weighted consumer inflation grew at a 2.5% annual rate in the 2nd quarter, revised from the 2.6% PCE inflation rate reported a month ago….real consumption of durable goods grew at a 4.9% annual rate, which was revised from the 4.7% growth rate shown in the advance report, and added 0.37 percentage points to GDP, as real consumption of motor vehicles, recreational goods and vehicles and furniture and appliances all contributed solidly to the durable goods increase….real consumption of nondurable goods by individuals rose at a 2.0% annual rate, revised from the 1.4% increase rate reported in the 1st estimate, and added 0.28 percentage points to 2nd quarter economic growth, as growth in food, gasoline and other non-durables consumption offset a modest decrease in real consumption of clothing and footwear….at the same time, consumption of services grew at a 2.9% annual rate, revised from the 2.2% growth rate reported last month, and added 1.30 percentage points to the final GDP tally, as a 3.0% growth rate in real consumption of health care accounted for about 40% of the growth in services…

Meanwhile, seasonally adjusted real gross private domestic investment grew at a 7.5% annual rate in the 2nd quarter, revised down from the 8.4% growth estimate reported last month, as real private fixed investment grew at a 3.0% rate, revised down from the 3.6% growth rate reported in the advance estimate, while real inventory growth was a bit less than previously estimated…real investment in non-residential structures now shows contraction at a 1.6% rate, revised up the 3.3% contraction rate previously reported, while real investment in equipment grew at 10.8% rate, revised down from the 11.6% growth rate shown a month ago….at the same time, the quarter’s investment in intellectual property products was revised to indicate growth at a 2.6% rate, down from the 4.5% growth rate previously reported, while real residential investment was shown to be shrinking at a 2.0% annual rate, revised from the 1.4% contraction rate shown in the previous report….after those revisions, the contraction in investment in non-residential structures subtracted 0.05 percentage points from the change in 2nd quarter GDP, while the increase in investment in equipment added 0.52 percentage points to the quarter’s growth, and the increase in investment in intellectual property added 0.14 percentage points to GDP, while the decrease in residential investment subtracted 0.08 percentage points from the 2nd quarter’s growth rate…

Meanwhile, the quarter’s growth of real private inventories was revised from the originally reported $71.3 billion in inflation adjusted dollars to indicate inventories grew at an inflation adjusted $69.0 billion rate…that came after inventories had grown at an inflation adjusted $28.6 billion in the 1st quarter, and hence the $40.3 billion positive change in real inventory growth from that of the 1st quarter added 0.78 percentage points to the 2nd quarter’s growth rate, revised from the 0.82 percentage point addition due to greater inventory growth shown 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 $40.3 billion increase in their growth means real final sales of GDP were smaller by that amount, and therefore the BEA found that real final sales of GDP grew at a 2.2% rate in the 2nd quarter, revised from the 2.0% rate of increase in real final sales shown in the advance estimate…

The previously reported increase in real exports was revised lower with this estimate, while the previously reported increase in real imports was revised a bit higher at the same time, and as a result the negative impact of our foreign trade on GDP was greater than in the advance estimate….our real exports grew at a 1.6% rate rather than the 2.0% 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 growth added 0.17 percentage points to the 2nd quarter’s growth rate, down from the 0.22 percentage point addition shown in the advance report….meanwhile, the previously reported 7.7% increase in our real imports was revised to a 7.8% increase, and since imports subtract from GDP because they represent either consumption or investment that was not produced here, their increase subtracted 0.94 percentage points from 2nd quarter GDP, revised from the advance report's subtraction of 0.93 percentage points…..thus our deteriorating trade balance subtracted a net 0.77 percentage points from 2nd quarter GDP, revised from the rounded 0.72 percentage point subtraction that had been indicated in the advance estimate…

Finally, there were also negative revisions to real government consumption and investment in this 2nd estimate, as the entire government sector grew at a 2.7% rate, revised from the 3.1% growth rate previously reported…real federal government consumption and investment was seen to have grown at a 3.3% rate from the 1st quarter in this estimate, which was revised from the 3.8% growth rate reported in the 1st estimate, as real federal outlays for defense were revised to show growth at a 4.9% rate, rather than the 5.2% grown rate previously reported, and added 0.18 percentage points to 2nd quarter GDP, while all other federal consumption and investment grew at a 1.2% rate, revised from the 2.2% growth rate previously reported, and added 0.01 percentage points to 2nd quarter GDP….meanwhile, real state and local consumption and investment grew at a 2.3% rate over the quarter, which was revised from the 2.6% growth rate reported in the 1st estimate, and added 0.25 percentage points to 2nd quarter GDP, with about a third of that coming from state and local investment, such as spending for public buildings or infrastructure….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, thus indicating there was an increase in the output of those goods or services…

July Personal Income Rose 0.3%, Personal Spending Rose 0.5%, PCE Price Index Rose 0.2%, Savings Rate at a 2 year Low

Other than the employment report and the GDP report itself, the monthly report on Personal Income and Outlays from the Bureau of Economic Analysis is probably the most important regular economic release we see each month, since each monthly report on personal consumption expenditures (PCE) accounts for roughly 23% of its quarter’s GDP by itself…in addition, this report also computes 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, our monthly personal income data, as well as 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 metrics is not the current monthly change; rather, they’re seasonally adjusted amounts expressed at an annual rate…however, the percentage changes are computed monthly, from one month’s 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 June to July..

Thus, when the opening line of the news release for the July report tell us “Personal income increased $75.1 billion (0.3 percent at a monthly rate) in July“, they mean that the annualized figure for seasonally adjusted personal income in July, $24,015.4 billion, was $75.1 billion, or more than 0.3% greater than the annualized personal income figure of $23,940.4 billion extrapolated for June; the actual, unadjusted change in national personal income from June to July, which is an order of magnitude lower, is not given…at the same time, annualized disposable personal income, which is income after taxes, rose by less than 0.3%, from an annual rate of $20,921.9 billion in June to an annual rate of $20,976.8 billion in July….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 figures…in July, the reasons for the $75.1 billion annual rate of increase in personal income include an annualized $43.0 billion increase in wages and salaries, an annualized $11.6 billion increase in business and farm proprietors’ income, and an annualized $12.5 billion increase in government social benefits to individuals…

For the personal consumption expenditures (PCE) that will be included in 3rd quarter GDP, BEA reports that they increased at a $103.8 billion annual rate, or by more than 0.5% from June, as the annual rate of PCE rose from $19,476.7 billion in June to $19,580.5 billion in July….June PCE was revised from $19,444.0 billion annually to $19,476.7 billion, while PCE for the months going back to April were also revised as well, all of which were already included in the revised 2nd estimate of 2nd quarter GDP which we reviewed earlier (data in this report, although released a business day later than the GDP release, is concurrent with GDP data)….total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $103.3 billion to $20,378.0 billion annually in July, which left total personal savings, which is disposable personal income minus total outlays, at a $598.8 billion annual rate in July, down from the revised $647.3 billion in annualized personal savings in June...as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 2.9% in July, down from a revised 3.1% in June, and the lowest personal savings rate since June 2022…

As you know, 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….the BEA does that by computing a price index for personal consumption expenditures, which is a chained price index based on 2017 prices = 100, and which is included in Table 5 in the pdf for this report…that index rose from 123.187 in June to 123.378 in July, a month over month inflation rate that’s statistically 0.15505%, which BEA reports as a PCE price index increase of 0.2 percent for July, following the increase of 0.1 percent in the PCE price index they reported for June…note that when the PCE price indexes are applied to a given month’s annualized PCE in current dollars, it yields that month’s annualized real PCE in chained 2017 dollars, which are the means that the BEA uses to compare the real 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 4 of the PDF, where we see that July’s chained dollar consumption total works out to an annual rate of 15,870.3 billion, 0.37696% more than June’s 15,810.7 billion, a difference in real PCE that the BEA reports as +0.4%…

However, to estimate the impact of the change in PCE on the change in GDP, the month over month change doesn’t help us much, since GDP is reported quarterly….thus we have to compare July’s real PCE to the real PCE of the 3 months of the second quarter….while this report shows real PCE for all those amounts monthly, the BEA also provides the quarterly annualized chained dollar PCE for those three months in table 3 of the pdf for the 4th quarter GDP report, where we find that the annualized real PCE for the 4th quarter was represented by 15,755.2 billion in chained 2017 dollars)….when we compare July’s 2017 adjusted PCE of 15,870.3 billion to the 2nd quarter adjusted PCE of 15,755.2 billion, we find that July real PCE has grown at a 2.954% annual rate from the 2nd quarter….that means that even if July’s real PCE growth does not improve during August and September, that growth in PCE would still add 2.03 percentage points to the growth rate of 3rd quarter GDP…

July Durable Goods: New Orders Rose 9.9%, Shipments Rose 1.2%, Inventories Rose 0.1%

The Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for July (pdf) from the Census Bureau reported that the value of the widely watched new orders for manufactured durable goods rose by $26.1 billion, or by 9.9 percent, to $289.6 billion in July, the fifth increase in six months, following a decrease of 6.9% to $263.6 billion in June’s new orders, ​which was revised from the 6.6% decrease to $264.5 billion reported for June’s new orders a month ago….even after the big increase in July, year to date new orders are still running 1.4% below those of 2023, albeit up from the 2.0% year-to date decrease we saw in this report last month…

As is usually the case, the volatile monthly change in new orders for transportation equipment drove this month’s headline change, as those transportation equipment orders rose $26.4 billion or 34.8 percent to $102.2 billion, on a $27,636 increase to $21,166 million in new orders for commercial aircraft (​NB: new aircraft orders had been negative in June)….excluding new orders for transportation equipment, other new orders were down 0.2% in July, while new orders for nondefense capital goods excluding aircraft, a proxy for equipment investment, fell 0.1% to $73,615 million…

The seasonally adjusted value of July’s shipments of durable goods, which will be inputs into various components of 3rd quarter GDP after adjusting for changes in prices, increased $3.1 billion or 1.1 percent to $291.1 billion, after the value of June shipments was revised from $288.1 billion to $288.0 billion, which is still a 1.2% increase from May….shipments of transportation equipment accounted for the July increase, as they rose $3.4 billion or 3.6 percent to $99.2 billion on a 29.2% increase in shipments of commercial aircraft, while shipments other than those of transportation equipment were 0.2% lower…meanwhile, the value of shipments of nondefense capital goods excluding aircraft was down 0.4% to $73,595 million, a decrease that will be reflected in 3rd quarter GDP equipment investment figures…

Meanwhile, the value of seasonally adjusted inventories of durable goods, also a major GDP contributor, rose for the third time in four months, increasing by $0.7 billion or 0.1 percent to $529.7 billion, after the value of end of June durable goods inventories was revised from $529.4 billion to $529.0 billion, now a 0.1% decrease from May…a $0.2 billion or 0.1% decrease to $172.1 billion in inventories of transportation equipment led the July inventory increase, due to a 0.5% increase in the value of inventories of motor vehicles and parts, but the value of inventories of durable goods other than transportation equipment was also up 0.1% at $357.6 billion…

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, rose for the forty-seventh time in forty-eight months, increasing by $3.3 billion or 0.2 percent to $1,386.5 billion….that followed a June decrease of $19.6 billion, or 1.4% to $1,383.9 billion that was revised from the $18.8 billion, 1.3% decrease to $1,384.3 billion that was previously reported .…a $3.1 billion or 0.3 percent increase to $892.4 billion in the value of unfilled orders for transportation equipment led the July increase, while unfilled orders excluding transportation equipment orders were up fractionally to $494,187 million….compared to a year earlier, the unfilled order book for durable goods is still 4.2% above the level of last July, as unfilled orders for transportation equipment are 7.1% above their year ago level, largely reflecting an 11.9% increase in the backlog of orders for commercial aircraft…

 

 

(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…)