August PCE, trade balance, construction, factory and wholesale inventories mostly down, but all add to Q3 GDP

Over recent days, we’ve seen the release of five reports which provide us with the lions share of contributions to 3rd quarter GDP for the months of July and August. The August report on Personal Income and Spending from the Bureau of Economic Analysis includes 2 months of data on personal consumption expenditures and thus accounts for more than 46% of 3rd quarter GDP by itself.  At the same time, the August report on our International Trade, the August report on Construction Spending (pdf), the Full Report on Manufacturers' Shipments, Inventories and Orders for August and the August report on Wholesale Trade, Sales and Inventories include metrics that lead us to estimates on how several other components of GDP will fare.  This post reviews those five reports, with an eye to assessing their impact on GDP growth. As we’ll see, despite headlines that generally indicated contraction, all of them will ultimately contribute to GDP growth in the 3d quarter.

August Personal Income up 0.2%; 2 Months PCE Would Add 1.68 Percentage Points to Q3 GDP

The August report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 3rd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for more than 2/3rds of GDP, and 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.  This report also gives us August's 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 metrics are not the current monthly change; rather, they're seasonally adjusted amounts at an annual rate, ie, they tell us how much income and spending would increase for a year if August's adjusted income and spending were extrapolated over an entire year.  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 July to August.

Thus, when the opening line of the press release for this report tell us "Personal income increased $39.3 billion (0.2 percent) in August", they mean that the annualized figure for seasonally adjusted personal income in August, $16,049.3 billion, was $39.3 billion, or somewhat more than 0.2% greater than the annualized  personal income figure of $16,010.0 billion for July.   The actual, unadjusted change in personal income for July to August is not given.  Similarly, annualized disposable personal income, which is income after taxes, also rose by more than 0.2%, from an annual rate of an annual rate of $14,043.8 billion in July to an annual rate of $14,075.7 billion in August.  The monthly contributors to the increase in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also thus annualized.  In August, the largest contributors to the $39.3 billion annual rate of increase in personal income were a $10.9 billion increase in interest and dividend income and a $10.3 billion increase in personal current transfer receipts.  Wages and salaries, on the other hand, only represented $8.8 billion of August's annualized increase in personal income.

For the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased at a $6.2 billion annual rate, or by less than 0.1 percent, as the annual rate of PCE rose from $12,796.1 billion in July to $12,802.3 in August.  That was as the July PCE figure was revised down slightly from the originally reported $12,797.6 billion annually and June PCE was revised down from $12,755.7 billion to $12,750.8 billion, and prior months were slightly revised as well, all of which were already included in the concurrent 3rd estimate of 2nd quarter GDP.  The current dollar increase in August spending resulted from a $29.9 billion annualized increase to an annualized $8,714.4 billion annualized in spending for services, which was mostly offset by a $23.7 billion decrease to $4,087.9 billion in annualized spending for goods, as we saw evidence of in the August retail sales report.  Total personal outlays for August, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $6.1 billion to $13,268.0 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $807.6 billion annual rate in August, up a bit from the revised $781.9 billion annualized personal savings in July. As a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.7% in August from July's savings rate of 5.6%...

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 2009 prices = 100, and which is included in Table 9 in the pdf for this report.  That index rose from 110.247 in July to 110.858 in August, a month over month inflation rate that's statistically 0.1436%, which BEA reports as an increase of 0.1 percent, following the statistically unchanged PCE price index they reported for July.  Applying that August inflation adjustment to the nominal amount of spending left real PCE down 0.1% in August, after a real PCE increase of 0.3% in July.  Notice that when those price indexes are applied to a given month's annualized PCE in current dollars, it yields that month's annualized real PCE in our familiar chained 2009 dollars, which are 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 we see that August's chained dollar consumption total works out to 11,548.6 billion annually, 0.096% less than July's 11,559.7 billion, a difference that the BEA rounds and reports as -0.1%...

However, to estimate the impact of the change in PCE on the change in GDP,  the month over month changes don't help us much, since GDP is reported quarterly.  Thus we have to compare July and August's real PCE to the the real PCE of the 3 months of the second quarter.  While this report shows PCE for all those amounts monthly, the BEA also provides the annualized chained dollar PCE for those three months in table 8 in the pdf for this report, where we find that the annualized real PCE for the 2nd quarter was represented by 11,484.9 billion in chained 2009 dollars. (NB: that's the same as what's shown in table 3 of the pdf for the revised 2nd quarter GDP report).  Then, by averaging the annualized chained 2009 dollar figures for July and August, 11,559.7 billion and 11,548.6 billion, we get an equivalent annualized PCE for the two months of the 3rd quarter that we have data for so far.  When we compare that average of 11,554.15 to the 2nd quarter real PCE of 11,484.9, we find that 3rd quarter real PCE has grown at a 2.43% annual rate for the two months of the 3rd quarter we have. (notice the math to get that annual growth rate: (((11,548.6 +11,559.7) / 2) / 11,484.9) ^4 = 1.024337 ).  That's a pace that would add 1.68 percentage points to the growth rate of the 3rd quarter by itself, assuming there is no improvement in September PCE from that average...

Trade Deficit Up 3.8% in August on Olympics' Broadcast Rights, Adds 94 Basis Poiints to GDP

Our trade deficit rose by 3.8% in August as the value of our exports increased but the value of our imports increased by a greater amount.  The Census report on our international trade in goods and services for August indicated that our seasonally adjusted goods and services trade deficit rose by $1.2 billion to $40.7 billion in August from a little revised July deficit of $39.5 billion.  The value of our August exports rose by $1.5 billion to $187.9 billion on a $1.2 billion increase to $125.3 billion in our exports of goods and a $0.3 billion increase to $62.5 billion in our exports of services, while our imports rose by $2.7 billion to $228.6 billion on a $1.1 billion increase to $185.6 billion in our imports of goods while our imports of services rose more than $1.5 billion to $43.0 billion.  The unusual increase in our services imports included a $1.2 billion increase in charges for the use of intellectual property relating to the rights to broadcast the 2016 Summer Olympic Games.  Export prices were on average 0.8% lower in August, so the relative amount of real August exports would be higher than the nominal amount by that percentage, while import prices were 0.2% lower, meaning real imports were larger than the nominal dollar values reported here by that small percentage....

The increase in our August exports of goods resulted from higher exports of industrial supplies and of automotive equipment, which was partially offset by lower exports of capital goods.  Referencing the Full Release and Tables for August (pdf), in Exhibit 7 we find that our exports of industrial supplies and materials rose by $1,371 million to $34,281 million on a $932 million increase in our exports of nonmonetary gold, a $270 million increase in our exports of crude oil, and a $249 million increase in our exports of nonferrous metals other than copper and aluminum, and that our exports of automotive vehicles, parts, and engines rose by $365 million to $12,520 million on a $378 million increase in our exports of new and used passenger cars and a $159 million increase in our exports of vehicle parts other than engines, bodies, or tires.   In addition, our exports of consumer goods rose by $104 million to $16,085 million on a $212 million increase in our exports of pharmaceuticals offset by a $105 million decrease in our exports of artwork and antiques.  Offsetting those category increases, our exports of capital goods fell by $701 million to $42,101 million on a decrease of $790 million in our exports of civilian aircraft and a $296 million decrease in our exports of electric apparatuses, and our exports of foods, feeds and beverages fell by $339 million to $14,333 million on decreases in our exports of fish and shellfish, miscellaneous animal feeds, corn and several food products.  There was also $29 million decrease to $4,857 million in our exports of other goods not categorized by end use..

Exhibit 8 in the Full Release and Tables gives us seasonally adjusted details on our goods imports and shows that higher imports of capital goods were responsible for the $1.1 billion increase in our goods imports, as they rose rose by $1,160 million to $50,167 million on a $606 million increase in our imports of civilian aircraft, a $333 million increase in our imports of telecommunications equipment, and a $245 million increase in our imports of computers. In addition, our imports of foods, feeds, and beverages rose by $254 million to $10,922 million on a $92 million increase in our imports of fruits and juices, and our imports of automotive vehicles, parts and engines rose by $240 million to $28,609 million on a $184 million increase in our imports of engines and engine parts, and our imports of goods not categorized by end use rose by $651 million to $7,950 million. Partially offsetting those increases, our imports of industrial supplies and materials fell by $839 million to $38,046 million on a $1,425 million decrease in our imports of non-monetary gold, and our imports of consumer goods fell by $289 million to $48,021 million on a $435 million decrease in our imports of pharmaceuticals and a $347 million decrease in our imports of cotton apparel and cotton household goods, which were partially offset by a $430 million increase in our imports of cellphones...

To gauge the impact of July and August goods trade on 3rd quarter GDP growth figures, we use exhibit 10 in the full pdf for this report, which gives us monthly goods trade figures by end use category and in total, already adjusted in chained 2009 dollars, the same inflation adjustment used by the BEA to compute trade figures for GDP, albeit they are not annualized here.  From that table, we can estimate that 2nd quarter real exports of goods averaged 118,135.3 million monthly in 2009 dollars, while inflation adjusted July and August exports were at 120,804 million and 123,001 million respectively, in that same 2009 dollar quantity index representation.  Annualizing the change between the two figures, we find that the 3rd quarter's real exports are running at a 13.4% annual rate above those of the 2nd quarter, or at a pace that would add about 1.18 percentage points to 3rd quarter GDP if continued through September.  In a similar manner, we find that our 2nd quarter real imports averaged 179,054 million monthly in chained 2009 dollars, while inflation adjusted July and August imports were at 179,029 million and 180,479 million respectively. That would indicate that so far in the 3rd quarter, real imports have been growing at annual rate of less than 1.57% from those of the 2nd quarter.  Since imports subtract from GDP because they represent the portion of consumption or investment that occurred during the quarter that was not produced domestically, their increase at a 1.57% rate would in turn subtract about 0.21 percentage points from 3rd quarter GDP.  Hence, if our July and August trade deficit in goods is maintained throughout September, our improving balance of trade in goods would add about 0.97 percentage points to the growth of 3rd quarter GDP.   However, the usually stable trade in services also saw a $1.2 billion deficit in the 3rd quarter, due to fees incurred in broadcasting the Olympics.   Without knowing how to adjust that for inflation, we'd note that the related services deficit would likely subtract about 0.03 or 0.04 percentage points from 3rd quarter GDP at the same time.

Construction Spending Down 0.7% in August, still adds to Q3 GDP

The August report on construction spending (pdf) from the Census Bureau estimated that our seasonally adjusted construction spending construction spending for the month was at an annual rate of $1,142.2 billion, which was 0.7 percent (±1.5%)* below the revised annualized estimate of $1,150.6 billion in construction spending in July and 0.3 percent (±1.8%)* below the estimated annualized level of construction spending of August of last year.   July construction spending was originally reported at a $1,153.2 billion annual rate, and it has thus been revised down to a $1,150.6 billion annual rate, while June construction spending was revised up from a $1,153.5 billion annual rate to a $1,154.134 billion rate, a revision that's probably not statistically significant enough to affect reported 2nd quarter GDP.

Private construction spending was at a seasonally adjusted annual rate of $871.6 billion in August, 0.3 percent (±1.2%)* below the upwardly revised July estimate of $874.6 billion, with residential spending of $449.2 billion down 0.3% (±1.3%)* from the upwardly revised annual rate of $450.4 billion in July, while private non-residential construction spending fell 0.4 percent (±1.2%)* to $422.4 billion from the downwardly revised July level, as August's figures included a 1.5% decrease in construction spending for power supply and a 1.4% decrease in spending for construction of manufacturing facilities.  At the same time, public construction spending was estimated to be at an annual rate of $270.5 billion, 2.0 percent (±2.5%)* below the revised July estimate of $276.0 billion, with public spending for highway construction down 2.9%(±5.9%)* to an annual rate of $84.6 billion.

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, getting an accurate read on the impact of August spending reported in this release on 3rd quarter GDP is difficult because all the figures given here are in nominal dollars and as you know, data used to compute the change in GDP must be adjusted for changes in price.  In lieu of the multiple prices indexes for construction listed in the National Income and Product Accounts Handbook, Chapter 6 (pdf), we've opted to use the producer price index for final demand construction as an inexact shortcut to make that adjustment and thereby produce an estimate..  That index showed that aggregate construction costs were unchanged in August after being down 0.6% in July, but after rising 0.1% in June and falling 0.1% from April in May...on that basis, we can estimate that construction costs for both July and August were roughly 0.6% less than June, 0.5% less than those of May and 0.6% less than those of April...we then use those percentages to deflate higher priced spending figures for each of those months, which is arithmetically the same as adjusting lower priced July and August construction spending upward, for comparison purposes.  Annualized construction spending in millions of dollars for the second quarter months is given as 1,154,134 for June, 1,143,750 for May, and 1,142,525 for April, while it was $1,150,638 million for July and $1,142,152 million for August.  Thus to compare July's inflation adjusted construction spending to that of the second quarter, our formula becomes: ((1,150,638 + 1,142,152) / 2) / ( (1,154,134 *.994 + 1,143,750 *.993 + 1,142,525 *.994) / 3) = 1.006015, meaning real construction over July and August was still up 0.6015% vis a vis the 2nd quarter, despite being down slightly in dollars.  In GDP terms, that means real construction for the 3rd quarter increased at an annual rate 2.428% over that of the 2nd quarter, or at a pace that would add about 0.04 percentage points to 3rd quarter GDP, should September follow the same trend.   

Factory Shipments Flat in August, Factory Inventories Up 0.2% in Big Boost to Q3 GDP

The Full Report on Manufacturers' Shipments, Inventories, & Orders (pdf) for August from the Census Bureau reported that the seasonally adjusted value of new orders for manufactured goods rose by $8.4 billion or 0.2 percent to $453.1 billion in August, following an increase of 1.4% in July, which was revised from the 1.9% increase reported last month. However, since the Census Bureau does not even collect data on new orders for non durable goods for this widely watched "factory orders report", both the "new orders" and "unfilled orders" sections of this report are really only useful as a revised update to the advance report on durable goods we reported on last week. This report showed that new orders for manufactured durable goods rose by $0.3 billion or 0.1 percent to $227.3 billion, revised up from last week’s published report indicating new orders were virtually unchanged..

This report also indicated that the seasonally adjusted value of August factory shipments rose for the fifth time in six months, increasing by a statistically insignificant $0.1 billion to $458.1 billion, following a 0.4% increase in July.  Shipments of durable goods were down by $0.4 billion or 0.2 percent to $232.2 billion, revised from the previously published $0.8 billion, 0.4% increase.  Meanwhile, the value of shipments (and hence of "new orders") of non-durable goods increased by $0.4 billion, or 0.2%, to $225.88 billion, as most non-durable producers saw small increases in shipments...

Meanwhile, the aggregate value of August factory inventories rose for the 2nd consecutive month, following 12 months of contraction, increasing by $1.0 billion or 0.2 percent to $622.0 billion, following a July increase of 0.2%.  July inventories of durable goods increased in value by $0.6 billion or 0.2 percent to $383.8 billion, revised from the 0.1% increase that was reported in the advance report last week.  At the same time, the value of non-durable goods' inventories increased by $0.4 billion or 0.2% to $238.1 billion, on a $0.4 billion or 1.5% increase in the value of petroleum and coal inventories.

For GDP purposes, factory inventories are adjusted with the appropriate components of the producer price index, which showed that aggregate prices were down 0.4% in both July and August, with producer prices for food, a major non-durable component, down 1.1% and 1.6% respectively, and producer prices for energy down 1.0% and 0.8% for those same months.   These price drops followed producer price increases of 0.5%, 0.7%, and 0.8% in April, May and June respectively.  Higher prices over those months meant that their real inventories were comparatively even lower than the decreases reported by the Census by those percentages, while lower prices for July and August means that real 3rd quarter inventories were that much higher.   Hence, the relatively small nominal increases in July and August inventories thus loom as a large boost to 3rd quarter GDP from the manufacturer's component of business inventories.

August Wholesale Sales Up 0.7%, Wholesale Inventories Down 0.1%, Also a GDP Plus

The August report on Wholesale Trade, Sales and Inventories (pdf) from the Census Bureau estimated that the seasonally adjusted value of wholesale sales was at $444.3 billion, up 0.7 percent (+/-0.5%) from the revised July level, and was also up 0.6 percent (+/-1.2%) from wholesale sales of August 2015..  The July preliminary estimate was revised down to $441.0 billion from the $441.9 billion in wholesale sales reported last month, which meant that the June to July change was revised from the preliminary estimate of a  0.4% percent (+/0.4) decrease to one of 0.6 percent (+/0.4).   August wholesale sales of durable goods were u down 0.5 percent (+/-0.7%) from last month, but were up 0.7 percent (+/-1.8%) from a year earlier, with a 2.7% drop in wholesale sales of machinery, equipment, and supplies leading the decrease for the month, partially offset by 1.4% higher wholesale sales of automotive equipment.  Wholesale sales of nondurable goods were up 2.0 percent (+/-0.7%) from July and were up 0.5 percent (+/-1.8%) from last August, with a 6.7% increase in wholesale sales of raw farm products accounting for more than a quarter of the August increase. As an intermediate activity, wholesale sales are not included in GDP except insofar as they are a trade service, since the traded goods themselves do not represent an increase in the output of the goods produced or finally sold....

On the other hand, the monthly change in private inventories is a major factor in GDP, as additional goods on the shelf represent goods that were produced but not sold, and this August report estimated that wholesale inventories were valued at a seasonally adjusted $589.1 billion at month end, down 0.2 percent (+/-0.4%) from the revised July level and 0.1 percent (+/-1.8%)* lower than in August a year ago.  July's inventory value was revised from $591.3 billion to $590.2 billion, which meant that the July to August percent change was revised from the advance estimate of down 0.1 percent (+/-0.4%) to down 0.2 percent (+/-0.4%).  Inventories of durable goods were up up 0.2 percent (+/-0.4%) from July, but were down 1.9 percent (+/-1.8%) from a year ago, with wholesale inventories of computer and computer peripheral equipment and software up 1.9% in the most significant August increase.  At the same time, the value of wholesale inventories of nondurable goods were down 0.7 percent (+/-0.5%) from July, but were up 2.8 percent (+/-3.0%) from last August, as the value of inventories of raw farm products fell 7.8%, not unexpected considering the large increase in wholesale sales..

Like factory inventories, August wholesale inventories would be deflated with the appropriate sub-indices of the August producer price index, which showed that aggregate prices for finished goods were down 0.4% in August, with producer prices for food down 1.6% and producer prices for energy down 0.8%, following producer price index decrease of 0.4% in July and increases of 0.5%, 0.7%, and 0.8% in April, May and June respectively, while the nominal value of inventories saw slower growth. Since both July and prices were down 0.4%, that means the real quantity of end of August wholesale inventories, down 0.2% nominally in both July and August, was actually about 0.4% greater than June, following a second quarter when aggregate real business inventories decreased.  Hence, the real increase in August inventories vis a vis the 2nd quarter also appears to provide a boost to 3rd quarter GDP from the wholesale component of business inventories...



(note: the above was excerpted from my synopses on Marketwatch 666)

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Dec Rate Hike

I guess Feds are going to increase interest rate next month. All data seems encouraging. Unemployment rate is very low, Wholesale Inventories are up 0.1%, and now with Trump coming to president's office, I feel Feds are definitely going to increase interest rate in December, 2016. I think this is for the best; keeping interest rate lower isn't gonna do much good anyway...

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