With the first Friday of the month, the Employment Situation Summary for May from the Bureau of Labor Statistics was obviously the most widely watched release of last week. But the week also saw the release of four reports for April that give us the lion's share of that month's contribution to 2nd quarter GDP, and in some cases suggest revisions to 1st quarter GDP. Those reports were the April report on Personal Income and Spending from the Bureau of Economic Analysis, the Commerce Dept report on our International Trade for April, the Full Report on Manufacturers' Shipments, Inventories and Orders for April and the April report on Construction Spending (pdf), both from the Census Bureau.
April Personal Consumption Up 1.0%, On Track to Add 2.05 Percentage Points to 2nd Quarter GDP
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 economic release we see monthly; as each monthly report on personal consumption expenditures (PCE) accounts for roughly 23% of GDP by itself. In addition, this report also includes 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, 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 amounts at an annual rate. In other words, they tell us how much income and spending would increase for a year if April'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 March to April..
Thus, when the opening line of the press release for this report tell us "Personal income increased $69.8 billion, or 0.4 percent, and disposable personal income (DPI) increased $63.5 billion, or 0.5 percent, in April", they mean that the annualized figure for seasonally adjusted personal income in April, $15,697.9 billion, was $69.8 billion, or actually somewhat more than 0.4% greater than the annualized personal income figure of $15,788.9 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 almost 0.5%, from an annual rate of an annual rate of $13,792.0 billion in March to an annual rate of $13,855.4 billion in April. Likewise, all the contributors to the increase in personal income, listed under "Compensation" in the press release, are also annualized amounts, all of which can be more clearly seen in the Full Release & Tables (PDF) for this release. So when the press release, or a news account copying from it says, "Wages and salaries increased $38.6 billion in April, compared with an increase of $30.7 billion in March", that really means wages and salaries would increase by $38.6 billion over an entire year if April's seasonally adjusted increase in wages and salaries were extrapolated over that year, just as personal current transfer payments from government agencies rose at a $12.5 billion annual rate and interest and dividend income, sometimes the largest contributor to the monthly personal income increase, rose at a $7.2 billion annual rate in April. So you can see what's written in the BEA press release is misleading, and often leads to media reports that parrot those lines the same way the BEA wrote them, and why we favor referencing the pdf in reviewing this report.
For the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased at a $119.2 billion rate, or a bit less than 1.0% from March, as the annual rate of PCE rose from $12,526.5 billion in March to $12,645.8 in April. March PCE was revised from $12,526.6 billion annually to $12,526.5 billion, while February PCE was revised higher, from $12,513.9 billion annual to $12,522.9 billion, which reduced the February to March change to 0.0%, which some reported as a downward revision. The current dollar increase in April spending resulted from a $68.6 billion annualized increase to an annualized $4,041.5 billion in spending for goods and a $50.6 billion increase to an annualized $8,604.3 billion in spending for services, so we can see the unusually large contribution from April retail sales. Total personal outlays for April, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $121.7 billion to $13,104.3 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $751.1 billion annual rate in April , down from the revised $809.4 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, fell to 5.4% in April from the March savings rate of 5.9%...
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. That index rose from 109.939 in March to 110.276 in April, a month over month inflation rate that's statistically 0.3065%, which BEA reports as an increase of 0.3 percent, following the PCE price index increase of 0.1% in March. Applying that inflation adjustment to the nominal amounts left real PCE up 0.6% in April, after the March real PCE increase was revised to statistically unchanged. Note 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. The result of that computation is shown in table 7 of the PDF, where we see that April's chained dollar PCE total works out to 11,467.7 billion annually, 0.6433% more than March's 11,394.4 billion, a difference that the BEA reports as 0.6%..
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 April's real PCE to the the real PCE of the 3 months of the first 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 1st quarter was represented by 11,330.7 billion in chained 2009 dollars. (Note that’s the same as is shown in table 3 of the pdf for the 1st quarter GDP report). When we compare April PCE of 11,467.7 to the 1st quarter real PCE of 11,384.2, we find that April real PCE has grown at a 2.97% annual rate compared to the 1st quarter. This means that even if April's real PCE does not improve during May and June, growth in PCE would still add 2.05 percentage points to the growth rate of the 2nd quarter.
Trade Deficit Increases 5.4% in April after Downward Revisions to Past 3 Years
The Census report on our international trade in goods and services for April release included an annual revision which revised statistics on trade in goods and services for the January 2013 to March 2016 period. As a result, our goods and services deficit was revised downward 3.5 percent for 2013, downward 3.6 percent for 2014, and downward 7.3 percent for 2015. Hence all changes in this month's report are from those revised figures, as if previously published monthly reports never existed. Thus, from those revised figures, this report indicated that our seasonally adjusted goods and services trade deficit rose by $1.9 billion to $37.4 billion in April from a March deficit which was effectively revised from the previously reported $40.4 billion down to $35.5 billion. The value of our April exports rose from the revised figures by $2.6 billion to $182.8 on a $2.9 billion increase to $120.1 billion in our exports of goods and a $0.3 billion decrease to $62.7 billion in our exports of services, while our imports rose $4.5 billion to $220.2 billion on a $4.3 billion increase to $178.9 billion in our imports of goods and a $0.3 billion increase to $41.4 billion in our imports of services (totals dont add due to rounding). Export prices averaged a 0.5% increase in April, so real exports will be reduced from the nominal amounts by 0.5% in national accounts data, while import prices were 0.3% higher, meaning real imports were smaller than the nominal dollar values reported here by that percentage....
Most of the increase in our April exports could be accounted for by higher exports of industrial supplies and materials and of automotive vehicles parts, and engines. Referencing the Full Release and Tables for April (pdf), in Exhibit 7 we find that our exports of industrial supplies and materials rose by $1,792 million to $32,475 million on increases in excess of $200 million in our exports of fuel oil, petroleum products other than fuel oil and organic chemicals. Our exports of automotive vehicles, parts, and engines rose by $839 million to $12,937 million on a $363 million increase in our exports of automotive parts other than tires and engines. In addition, our exports of foods, feeds and beverages rose by $420 million to $9,835 million on a $114 million increase in our exports of corn, our exports of consumer goods rose by $188 million to $15,830 million on a $298 million increase in our exports of gem diamonds, and our exports of capital goods rose by $109 million to $43,524 million on increases in excess of $200 million in exports of computer accessories, aircraft parts, and electric apparatuses, which were partially offset by a $375 million decrease in our exports of oilfield drilling equipment. At the same time, our exports of other goods not categorized by end use fell by $583 million to $5,025 million.
Exhibit 8 in the Full Release and Tables gives us seasonally adjusted details on our imports and shows that our imports of most end use categories increased, led by a $2,507 million increase to $49,589 million in our imports of capital goods, mostly due to a $796 million increase in our imports of civilian aircraft, a $394 million increase in our imports of computers, and a $321 million increase in our imports of electrical apparatuses. Our imports of industrial supplies and materials rose by $1131 million to $33,971 million on a $288 million increase in our imports of petroleum products other than fuel oil and a $171 million increase in our imports of crude oil, and smaller increases in our imports of other materials. Our imports of consumer goods rose by $509 million to $46,757 million on a $431 million increase in our imports of cotton apparel and household goods, a $382 million increase in our imports of toys, games, and sporting goods, and a $316 million increase in our imports of televisions and video equipment and increases in a number of other consumer goods which were partially offset by a $1256 million decrease in our imports of cellphones and a $786 million decrease in our imports of pharmaceutical preparations. In addition, our imports of automotive vehicles, parts and engines rose $498 million to $28,772 million on a $712 million increase in our imports of automotive parts other than tires and engines, and our imports of foods, feeds, and beverages rose by $222 million to $10,723 million on higher imports of most foodstuffs, while our imports of goods not categorized by end use fell by $530 million to $7,361 million.
Obviously, with the smaller than previously reported trade deficit over the past three years, GDP for each of those years will have to be revised higher, but that won't happen until the annual revisions to GDP are prepared later this summer. Meanwhile, to gauge the impact of April trade on 2nd quarter growth figures, we'll 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 calculate that 1st quarter real exports of goods averaged 117,576.3 million monthly in 2009 dollars, while inflation adjusted April exports were at 119,462 million in the same 2009 dollar quantity index representation. Annualizing the change between the two figures, we find that April's real exports are running at a 6.6% annual rate above those of the 1st quarter, or at a pace that would add about 0.51 percentage points to 2nd quarter GDP if continued through May and June. In a similar manner, we find that our 1st quarter real imports averaged 178,034 million monthly in chained 2009 dollars, while inflation adjusted April imports were at 177,996 million. That would indicate that so far in the 2nd quarter, our real imports have decreased at a 2.1% annual rate from those of the 1st 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 2.1% rate would thus add about 0.27 percentage points to 2nd quarter GDP. Hence, if the April trade deficit is maintained throughout the 1st quarter, our improving balance of trade in goods would add about 0.78 percentage points to the growth of 2nd 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 the component price changes.
Construction Spending Falls 1.8% in April after February and March are Revised Higher
The April report on construction spending (pdf) from the Census Bureau estimated that our seasonally adjusted construction spending for the month would work out to $1,133.9 billion annually if extrapolated over an entire year, which was 1.8 percent (±1.3%) below the revised annualized estimate of $1,155.1 billion in construction spending in March and 4.5 percent (±1.6%) above the estimated annualized level of construction spending of April last year. March construction spending was originally reported at $1,137.5 billion annually, and it has now been revised up to $1,155.1 billion annually, while February construction spending was revised up from a $1,133.6 billion annual rate to a $1,137.9 billion rate. The combined revisions to February and March construction spending should add about 0.18 percentage points to first quartet GDP when the third estimate is released the last week of June.
Private construction spending was at a seasonally adjusted annual rate of $843.1 billion in April, 1.5 percent (±0.8%) below the revised March estimate of $855.9 billion, with residential spending of $439.7 billion 1.5 percent (±1.3%) below the upwardly revised annual rate of $446.3 billion in March, while private non-residential construction spending fell 1.5 percent (±0.8%) to $403.5 billion from the revised March level on 3.6% decreases in private spending for construction of both commercial and health care facilities and a 7.2% decrease in communication construction spending. At the same time, public construction spending was estimated to be at an annual rate of $290.8 billion, 2.8 percent (±2.5%) below the revised March estimate of $299.2 billion, with spending for highway construction down 6.6 percent (±7.2%)* to an annual rate of $89,384 billion, which was still 4.0% higher than a year earlier..
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 April spending reported in this release on 2nd 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. The National Income and Product Accounts Handbook, Chapter 6 (pdf), lists a multitude of privately published deflators that are used by the BEA for each of the various components of non-residential investment, such as the Turner Construction building-cost indices for several types of buildings and the Engineering News Record construction cost index for utilities construction, while it specifies use of the Census Bureau construction price indexes for new one-family houses under construction and for new multi-family homes under construction for residential investment. Therefore, to quickly come up with rough estimate on real construction over the period in question, we've decided to use the producer price index for final demand construction as an inexact shortcut. That index showed that aggregate construction costs were up 0.8% in April, up 0.1% in March and down 0.1% in February and down 0.5% in January. On that basis, we can estimate that April construction costs were roughly 0.9% greater than those of February and 0.8% greater than those of January. We then use those percentages to inflate spending for each of those months, which is arithmetically the same as deflating April construction spending, for the comparison we need. Construction spending in millions of dollars for the first quarter is given as 1,155,122 for March, 1,137,868 for February, and 1,121,975 for January. Thus to compare April's inflation adjusted construction spending to that of the first quarter, our formula becomes: 1,133,932 / ((1,155,122*1.008 + 1,137,868 *1.009 + 1,121,975 * 1.008)/3) = 0.98791. That means real construction spending in April was down roughly 1.2% vis a vis the 1st quarter, or down at a 4.75% annual rate. To figure the effect of that change on GDP, we annualize the difference between the first quarter average and April and take the result as a fraction of 1st quarter GDP, and find that April construction spending is falling at a rate that would subtract 0.34 percentage points from 2nd quarter GDP.
Factory Shipments Up 0.5% in April, Factory Inventories Down 0.1%
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 $8.7 billion or 1.9 percent to $460.5 billion in March, following an increase of 1.7% in March, which was revised from the 1.1% 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 showed that new orders for manufactured durable goods increased by $7.7 billion or 3.4% to $236.2 billion in April, virtually unchanged from what was reported then.
This report also indicated that the seasonally adjusted value of April factory shipments rose for the second month in a row after being down 8 straight months, increasing by $2.2 billion or 0.5 percent to $456.8 billion, following a 0.3 percent increase in March, which had previously been reported as an 0.5% increase...shipments of durable goods were up by $1.3 billion or 0.5 percent to $232.5 billion, down from the 0.6% increase that was reported last week. Meanwhile, the value of shipments (and hence of "new orders") of non-durable goods rose by $1.0 billion, or 0.4%, to $224.3 billion, as a 1.8% increase in the value of shipments from refineries was offset by lower shipments of other nondurables.
Meanwhile, the aggregate value of April factory inventories fell for the 9th time in the past ten months, decreasing by $0.5 billion or 0.1 percent to $620.8 billion, following a March increase of 0.1% that was reported as a 0.2% increase last month....inventories of durable goods decreased $0.6 billion to $384.5, revised from the $0.2 billion decrease that was reported was reported last week....the value of non-durable goods' inventories was statistically unchanged at $236.3 billion, following a decrease of 0.1% in March....producer prices for finished goods were up 0.2% in April, with producer prices for energy goods also up 0.2%, so after non-durable factory inventories are adjusted for inflation, non-durable inventories will show a real decrease on the order of 0.3% for the month...with only this month of factory inventory data to go on, then, it looks like this decrease will contribute to a modest subtraction from 2nd quarter GDP figures, although a lot can change between now and the end of July when the first estimate for the 2nd quarter will be released.
(note: the above was excerpted from my weekly synopsis at Marketwatch 666…)