July PCE, Trade Deficit, Construction, and Factory Inventories Point to 3rd Qtr GDP Growth Over 3%

In addition to the Employment Situation Summary for August from the Bureau of Labor Statistics, last week also saw the release of four July reports that give us the lion's share of that month's contribution to 3rd quarter GDP, and in some cases suggest revisions to 2nd quarter GDP.  Those reports were the July report on Personal Income and Spending from the Bureau of Economic Analysis, and the July report on our International Trade, the July report on Construction Spending (pdf), and the Full Report on Manufacturers' Shipments, Inventories and Orders for July, all from the Census Bureau.  This post reviews those four reports, with an eye to assessing their impact on GDP growth.

July Personal Consumption Expenditures Up 0.33%, Would Add 1.89 Percentage Points to Q3 GDP

The July report on Personal Income and Outlays from the Bureau of Economic Analysis includes the month's data for our personal consumption expenditures (PCE), which accounts for roughly 69% 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 also reports our 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 amounts at an annual rate, ie, they tell us how much income and spending would increase for a year if July'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 June to July..

Thus, when the opening line of the press release for this report tell us "Personal income increased $71.6 billion (0.4 percent) in July", they mean that the annualized figure for seasonally adjusted personal income in July, $16,023.4 billion, was $71.6 billion, or actually somewhat more than 0.4% greater than the annualized personal income figure of $15,951.7 billion extrapolated for June; the actual, unadjusted change in personal income from June to July is not given.  At the same time, annualized disposable personal income, which is income after taxes, also rose by more than 0.4%, from an annual rate of $13,999.8 billion in June to an annual rate of $14,059.9 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...in July, the largest contributors to the $71.6 billion annual rate of increase in personal income were a $43.3 billion increase in wages and salaries and a $12.0 billion increase in personal current transfer receipts.

For the personal consumption expenditures (PCE) that we're interested in today, BEA reports that they increased at a $42.0 billion rate, or a bit more than 0.3% from June, as the annual rate of PCE rose from $12,755.7 billion in June to $12,797.6 in July.  June PCE was revised from $12,738.8 billion annually to $12,755.7 billion, while PCE for months going back to January were also revised as well, all of which was already included in the 2nd estimate of 2nd quarter GDP which we reviewed last week (this report, although released a business day later than the GDP release, is concurrent).  The current dollar increase in July spending resulted from a $9.5 billion annualized increase to an annualized $4,109.3 billion in spending for goods and a $32.5 billion increase to an annualized $8,688.3 billion in spending for services, as a decrease in consumption of non-durable goods offset an increase in spending for new motor vehicles.  Total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $41.6 billion to $13,265.2 billion annually in July, which left total personal savings, which is disposable personal income less total outlays, at a $794.7 billion annual rate in July, up from the revised $776.2 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, rose to 5.7% in July from the June savings rate of 5.5%...

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. That's done with the price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, which is included in Table 9 in the pdf for this report.  In a statistical oddity, that index was at 110.659 in July, exactly the same as it was in June, meaning our PCE inflation adjustment for July is 0.000%, following the PCE price index change of +0.10037 in June, which the BEA rounded to +0.1% in the press release.  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 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 July's chained dollar consumption total works out to 11,565.2 billion annually, 0.3288% more than June's 11,527.3 billion, a difference that the BEA reports as +0.3%...

However, to estimate the impact of the change in July 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 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 quarterly 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 11,487.4 billion in chained 2009 dollars (ie, that's the same as was shown in table 3 of the pdf for the 1st quarter GDP report).  When we compare July PCE of 11,565.2 to the 2nd quarter real PCE of 11,487.4, we find that July real PCE has grown at a 2.74% annual rate compared to the 2nd quarter.  This means that even if real PCE does not improve during August and September, growth in PCE would still add 1.89 percentage points to the growth rate of the 3rd quarter...

Higher July Soybean Exports, Lower Drug, Cellphone and Aircraft Imports Add 76 Basis Points to Q3 GDP

Our trade deficit fell by 11.6% in July as the value of our exports increased and the value of our imports decreased.  The Census report on our international trade in goods and services for July indicated that our seasonally adjusted goods and services trade deficit fell by $5.2 billion to $39.5 billion in July from a revised June deficit of $44.7 billion.  The value of our July exports rose by $3.4 billion to $186.3 billion on a $3.4 billion increase to $124.1 billion in our exports of goods and less than a $0.1 billion decrease to $62.3 billion in our exports of services, while our imports fell by $1.8 billion to $225.8 billion on a $1.9 billion decrease to $184.4 billion in our imports of goods while our imports of services rose $0.1 billion to $41.4 billion.  Export prices were on average 0.2% higher in July, so the relative amount of real July exports would be lower than the nominal amount by that percentage, while import prices were 0.1% higher, meaning real imports were smaller than the nominal dollar values reported here by that small percentage..

The increase in our July exports resulted from higher exports of foods, feeds and beverages, and more specifically exports of soybeans.  Referencing the Full Release and Tables for July (pdf), in Exhibit 7 we find that our exports of foods, feeds and beverages rose by $3,725 million to $14,680 million on a $3,556 million increase in our exports of soybeans.  That exhibit also shows that our exports of industrial supplies and materials rose by $445 million to $32,878 million on a $209 million increase in our exports of precious metals other than gold, and a $205 million increase in our exports of fertilizers, 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.  Partially offsetting those increases, our exports of consumer goods fell by $15 million to $15,980 million, as a $179 million decrease in our exports of artwork and antiques and a $129 million decrease in our exports of pharmaceuticals were partially offset by a $150 million increase in our exports of jewelry.  In addition, our exports of capital goods fell by $226 million to $42,801 million on a decrease of $718 million in our exports of civilian aircraft which was partially offset by a $357 million increase in our exports of electric apparatuses, and a there was also $674 million drop to $4,852 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 imports and shows that lower imports of consumer goods and capital goods were responsible for the $1.9 billion drop in our goods imports.  Our imports of consumer goods fell by $1,492 million to $48,307 million on a $963 million decrease in our imports of pharmaceuticals, a $642 million decrease in our imports of cellphones, and a $257 million decrease in our imports of gem diamonds, and our imports of capital goods fell by $722 million to $49,010 million on a $870 million decrease in our imports of civilian aircraft.  In addition, our imports of automotive vehicles, parts and engines fell by $67 million to $28,364 million on a $184 million decrease in our imports of passenger cars, and our imports of goods not categorized by end use fell by $215 million to $7,300 million.  Partially offsetting those decreases, our imports of industrial supplies and materials rose by $388 million to $38,845 million on a $694 million increase in our imports of non-monetary gold, and our imports of foods, feeds, and beverages rose by $201 million to $10,660 million on a $92 million increase in our imports of fruits and juices, and smaller increases in several other food line items...

To gauge the impact of July trade on 3rd quarter GDP growth figures, we use exhibit 10 in the 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 exports were at 120,747 million in the same 2009 dollar quantity index representation.  Annualizing the change between the two figures, we find that July's real exports are running at a 9.1% annual rate above those of the 2nd quarter, or at a pace that would add about 0.75 percentage points to 3rd quarter GDP if continued through August and 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 imports were at 179,021 million.  That would indicate that so far in the 3rd quarter, we have seen a negligible decrease at annual rate of less than 0.1% in our real imports 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 decrease at a 0.1% rate might conversely add about 0.01 percentage points to 3rd quarter GDP.  Hence, if the July trade deficit is maintained throughout the 3rd quarter, our improving balance of trade in goods would add about 0.76 percentage points to the growth of 3rd quarter GDP.  Note that we have not computed the impact of the less volatile change in services here because the Census does not provide inflation adjusted data on those, and we don't have easy access to all their price changes... 

Construction Spending Unchanged in July After May and June are Revised Higher; Adds to Q2 and Q3 GDP

The July report on construction spending (pdf) from the Census Bureau estimated that our seasonally adjusted construction spending for the month would work out to $1,153.2 billion annually if extrapolated over an entire year, which was statistically unchanged (±1.5%) from the revised annualized estimate of $1,153.5 billion in construction spending in June and 1.5 percent (±2.3%)* above the estimated annualized level of construction spending of July last year.  June construction spending was originally reported at $1,133.5 billion annually, and it has now been revised up to $1,153.5 billion annually, while May construction spending was revised up from a $1,140.9 billion annual rate to a $1,143.75 billion rate.  The combined upward revisions to May and June construction spending should add about 0.17 percentage points to second quarter GDP when the third estimate is released the last week of September...

Private construction spending was at a seasonally adjusted annual rate of $875.0 billion in July, 1.0 percent (±1.5%)* above the upwardly revised June estimate of $866.5 billion, with residential spending of $445.5 billion up 0.3% (±1.3%)* from the downwardly revised annual rate of $444.0 billion in June, while private non-residential construction spending rose 1.7 percent (±1.5%) to $429.5 billion from the upwardly revised June level, as July's figures included a 4.6% increase in construction spending for office buildings and a 3.9% increase in spending for construction of manufacturing facilities.  At the same time, public construction spending was estimated to be at an annual rate of $278.2 billion, 3.1 percent (±2.6%) below the revised June estimate of $287.0 billion, with public spending for power facilities down 27.1% to an annual rate of $7,632 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, getting an accurate read on the impact of July spending reported in this release on 3rd quarter 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.  In lieu of the multiple prices indexes for construction spending adjustment 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.  That index showed that aggregate construction costs were down 0.6% in July, after rising 0.1% in both May and June.  On that basis, we can estimate that July construction costs were roughly 0.5% less than those of May and 0.4% 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 inflating July construction spending, for comparison purposes.  Annualized construction spending in millions of dollars for the second quarter is given as 1,153,520 for June, 1,143,750 for May, and 1,142,525 for April.  Thus to compare July's inflation adjusted construction spending to that of the first quarter, our formula becomes: 1,153,175 / ( (1,153,520 *.994 + 1,143,750 *.995 + 1,142,525 *.996) / 3) = 1.01079, which means real construction spending in July was up 1.079% vis a vis the 2nd quarter, or up at a 4.39% annual rate.  To figure the effect of that change on GDP,  we annualize the difference between the second quarter average and July and take the result as a fraction of 2nd quarter GDP, and find that July construction spending is rising at a rate that would add between 0.07 and 0.08 percentage points to 3rd quarter GDP…

Factory Shipments Down 0.2% in July, Factory Inventories Up 0.1% in Big Boost to Q3 GDP

The Full Report on Manufacturers' Shipments, Inventories, & Orders (pdf) from the Census Bureau reported that the seasonally adjusted value of new orders for manufactured goods rose by $8.4 billion or 1.9 percent to $454.8 billion in July, following a decrease of 1.8% in June, which was revised from the 1.5% decrease 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 $9.6 billion or 4.4 percent to $228.6 billion, virtually unchanged from the previously published increase..

This report also indicated that the seasonally adjusted value of July factory shipments fell for the first time in five months, decreasing by $0.9 billion or 0.2 percent to $458.9 billion, following a 0.6% increase in June.  Shipments of durable goods were up by $0.3 billion or 0.1 percent to $232.7 billion, revised from the previously published $0.4 billion, 0.2% increase.   Meanwhile, the value of shipments (and hence of "new orders") of non-durable goods fell by $1.1 billion, or 0.5%, to $226.1 billion, as a price related $1.5 billion, 4.8% drop in the value of shipments from petroleum refineries accounted for the entire decrease..

Meanwhile, the aggregate value of June factory inventories rose for the first time in the past thirteen months, increasing by $0.9 billion or 0.1 percent to $620.3 billion, following a June decrease that was reported as virtually unchanged.   July inventories of durable goods increased in value by $1.4 billion or 0.4 percent to $383.1 billion, revised from the 0.3% increase that was reported in the advance report last week.  On the other hand, the value of non-durable goods' inventories decreased by $0.5 billion or 0.2% to $237.2 billion, following a series of three increases, on a 2.3% drop in the value of petroleum inventories.

For GDP purposes, factory inventories are deflated with the appropriate components of the producer price index, which showed that aggregate prices were down 0.4% in July, with producer prices for food down 1.1% and producer prices for energy down 1.0%, following 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 even lower than the decreases reported here by those percentages, while lower prices in July means that real July inventories were that much higher.  Hence, the small nominal increase in July inventories now looms as a large boost to 3rd quarter GDP from the manufacturer's component of business inventories.

 

(Note: the above was taken from my weekly synopsis at Marketwatch 666)            

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should mention

ISM manufacturing is down, showing contraction. I've stopped covering it because they made getting the data very difficult so no graphs.

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ISM

i know the PMIs are widely followed, but since they are surveys of execs rather than data, they don't feed into GDP, all i've been doing is noting the index values...both of them took a tumble in August, we'll have to wait to see how that plays out in the regular August releases..

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rjs

well, the fact they deny the data

to the public is ridiculous. I guess they are trying to get money for the index, it should probably be paid by industry or large institutions.

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