January personal consumption, trade, construction and factory inventories

Since last week was the first week of the month, the key report was obviously the Employment Situation Summary for February from the Bureau of Labor Statistics. But the week also saw the release of four reports that together will make up the lion’s share of January’s contribution to 1st quarter GDP: the January release on Personal Income and Spending from the Bureau of Economic Analysis, the January Report on our International Trade. the Full Report on Manufacturers’ Shipments, Inventories and Orders for January and the January report on Construction Spending. all from the Census Bureau. Today, we will look at those four reports with an eye to how they might affect first quarter economic growth figures. This is a bit wonkish, so if you have any questions, please ask them.

Real Personal Consumption Growth in January was at a 1.8% Rate

Other than the employment reports and the GDP report itself, the monthly report on Personal Income and Outlays from the Bureau of Economic Analysis is probably the most important release of the month, as it gives us important personal income data, the monthly data on our personal consumption expenditures (PCE), the major component of GDP, and the PCE price index, the inflation gauge the Fed targets. But contrary to what you might think, the January report on Income & and Outlays from the BEA does not give us details on personal income or spending for January, as all the dollar amounts given in this report are seasonally adjusted and at an annual rate, ie, they tell us what income and spending would be for a year if January’s adjusted income and spending were extrapolated over an entire year. Confusingly, however, the percentage changes are computed monthly, and in this case they give us the change in each metric from December to January. And of course, the price index changes are also reported on both a month over month and year over year basis..

So let’s unwrap the opening line, which reads Personal income increased $50.8 billion, or 0.3 percent, and disposable personal income (DPI) increased $52.6 billion, or 0.4 percent, in January That refers to hypothetical annualized personal income increase of $50.8 billion, from $15,011.0 billion annually in December to $15,061.8 billion annually in January (see pdf ); the actual monthly increase in personal income is not given, but it’s likely on the order of one-twelfth that. Similarly, disposable personal income, which is income after taxes, rose by 0.4%, from an annual rate of $13,207.4 billion in December to an annual rate of $13,260.0 billion in January. The contributors to the increase in personal income, listed under Compensation in the press release. are also annualized amounts. Hence, when they say, Wages and salaries increased $42.4 billion in January that really means wages and salaries would rise by $42.4 billion over an entire year if January’s increase were extrapolated over an entire year. So you can see that what’s written here is virtually inscrutable, and often leads to misreporting the data the same way the BEA describes it.

Now, there’s a reason for this, in that this report is one of the wonky reports included in BEA’s reports on U.S. National Income and Product Accounts. which ultimately inputs into the gross domestic product and gross domestic income reports, which are all reported in the same manner, and which are the primary macroeconomic overviews of the US economy. And that’s where our interests lie today, too; we want to see how this January report fits into 1st quarter GDP. To do that, we start with the change in personal consumption expenditures, which you all know as the largest component of GDP, accounting for over two-thirds of real GDP growth. So when this report tells us that personal consumption expenditures (PCE) decreased $18.9 billion, or 0.2 percent in January, they’re referring to the decrease from an seasonally adjusted annual rate of $12,106.8 billion in personal consumption expenditures in December to the $12,087.9 billion annual rate of personal consumption in January. While the decrease in annualized PCE for December was revised from the originally reported $40.0 billion to $35.7 billion, but that change was already reflected in last Friday’s GDP revision (this report was released Monday)..

Now, some reported this decline in PCE as a sign of a slowing economy. but as we 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 included in this report, which is a chained price index based on 2009 prices = 100. Looking at Table 9 in the pdf. we see that that index fell to 108.281 in January from 108.771 in December, giving us a negative month over month inflation rate of 0.045%, which BEA reports as -0.5%, and a year over year PCE price index increase of 0.22%, down from a year over year inflation rate of 0.77% in December. This decrease was largely due to a 1.6% price decline for goods, as the cost of services still rose 0.1% in January. Hence, because of the decrease in prices, the inflation adjusted or real personal consumption expenditures actually increased 0.3% (0.29%) in January after falling 0.1% in December, when the PCE price index was reported down 0.2%. So despite the lower dollar value of personal spending in January, those fewer dollars spent bought 0.3% more stuff than they did in December. And since the growth rate in PCE for all of 2014 was 2.5%, that means the real January growth in PCE was stronger than its growth in 2014.

However, it’s not the change in PCE from December to January that we’re interested in in our attempt to assess the impact of January PCE on GDP, but the change from the 4th quarter to January. Now we could compute that using the October, November, & December inflation adjusted annual PCE spending rates found in Table 7 of the pdf for this release. but the easiest way is to just go back to the GDP revisions from last Friday, where we find the seasonally adjusted annual PCE was $11,113.6 billion in chained 2009 dollars in the 4th quarter (Table 3, pdf ). From that, we find that January’s 11,163.6 billion in inflation adjusted PCE was 0.045% higher than the $11,113.6 billion in chained 2009 dollars reported for the 4th quarter. Converting that to an annual rate. we thus find that the annual rate of real PCE growth in January to be 1.8% over that of the 4th quarter.

We Estimate Real Exports Fell 1.02% in January While Real Imports Rose 0.93%

The January report on trade showed that our goods and services deficit fell by $3.8 billion to $41.8 billion, down from the revised December deficit of $45.6 billion, as our January exports fell $5.6 billion to $189.4 billion, and our January imports fell $9.4 billion to $231.2 billion. However, since crude oil accounts for roughly 10% of our imports and prices of other imported and exported commodities were also down, these dollar denominated figures may not reveal the real state of our balance of trade. While the value of oil imports fell from $18,164 million in December to $13,626 million in January, the average price of our oil imports fell to $58.96 a barrel in January, down from $73.64 in December (and down from $90.21 in January 2014). Hence, we imported 231,106 barrels of oil in January, not down quite as much from the 246,659 barrels we imported in December. A similar calculation could be made with our exports of fuel oil, the value of which fell from $4,049 million in December to $3,224 million in January, or our exports of other refined products, which fell from $4,495 million to $4,161 million

So, it’s obvious that to find the real change in our January imports and exports in order to apply them to 1st quarter GDP, they must be adjusted for these changes in price. That’s done with the prices from the Import and Export Price Indexes for January. which were published 3 weeks ago by the BLS. Now while the BEA will adjust the price of each of the several hundred items in the trade report (see Exhibit 7 and Exhibit 8 in the pd f) with the appropriate price index, we dont have the computing power to do that here, so we’ll just estimate by applying the overall change in the price indexes to the overall amounts of imports and exports.

The Import Price Index indicates that overall prices for our imports were down 2.8% in January. Applying that to our January imports of $231.2 billion would give us real imports of $237.7 billion in January, at least vis a vis December (understand that these adjusted dollar values are for comparison purposes only, and have no more connection to reality than the chained 2009 dollars that are used by the BEA when they compute GDP). That means our real imports were only $2.9 billion lower than in December. In the same manner, applying the 2.0% lower prices of January exports to the January export value of $189.4 billion, we’d find that real January exports rose to $193.2 billion when compared to December, and therefore our real exports only fell by $1.8 billion. Hence, our real trade deficit only rose by $1.1 billion in January.

However, to gauge the impact of January trade on GDP, it must be compared to the 4th quarter trade, not just December’s. The difficulty in doing that is that the GDP report gives trade data quarterly at a seasonally adjusted annual rate, both in current dollars and in chained 2009 dollars, and moreover some components that are included in the trade report, such as non-monetary gold, are not included in GDP. So the best we can do is estimate from what comparable trade figures we have available in here. According to this revised trade report, the dollar value of our unadjusted exports for October, November and December were $197,496 million, $196,896 million, and $196,836 million respectively; to get real values from those to compare to our real January trade, which is already adjusted to December, we’d have to adjust November exports for the 1.0% December change in export prices, and October’s for both the 0.9% November and 1.0% December change in export prices. When we do that, we get an inflation adjusted $195.2 billion monthly average of exports for the 4th quarter to compare to our inflation adjusted January exports of $193.2 billion, indicating real January exports were $2.0 billion lower than the 4th quarter. Similarly, our unadjusted imports for October, November and December were valued at $239,223 million, $238,495 million, and $239,178 million respectively. To index those imports to December, November’s would have to be adjusted with the 1.9% decrease in December import prices, and October’s would have to be adjusted for that as well as November’s 1.8% decrease in import prices. Hence, our inflation adjusted monthly imports chained to December prices averaged $235.5 billion in the 4th quarter. lower than the imports of $237.7 billion in January that we adjusted for the January price change. Thus, we’d estimate real imports rose by $2.2 billion or by 0.93% in January, or quarterly at an annual rate of 3.8%, a pace that if continued would take more than 0.6% off first quarter GDP, while the 1.02% decrease in real exports could take another 0.5% off GDP.

Lower January Construction Spending on Track to Subtract 0.42% from 1st Quarter GDP

Construction spending inputs into 3 components of GDP; investment in private non-residential structures, investment in residential structures, and into government investment, for both state and local and Federal governments. But unlike personal consumption and trade, where negative deflators contributed to growth in the metrics, the deflators used for construction spending are going to reduce growth because prices for construction have continued to rise. Looking at the National Income and Product Accounts Handbook ,Chapter 6 (pdf), we find that the deflators used for residential investment are the Census Bureau price indexes for new one-family houses under construction and for new multi-family homes under construction, while a multitude of indexes are used to deflate other components of construction spending, ie, the Turner Construction building-cost index for several types of buildings, the PPI for new school construction, the Engineering News Record construction cost index for utilities construction, and so forth. Since we can’t do all of that today, we’ll simply this computation by making our estimates of January construction inflation based on 4th quarter deflators, figuring most construction prices have not seen a major change over one month..

So, in January, the Census Bureau estimated (pdf) that our seasonally adjusted construction spending would work out to $971.4 billion annually if extrapolated over an entire year, which was 0.4 percent (±1.3%)* above the revised December annual rate and 2.2 percent (±1.6%) above above last December’s adjusted and annualized level of construction spending. December’s spending estimate was revised from $982.1 billion to $982.0 billion, probably not statistically significant enough to impact 4th quarter GDP much. Private construction spending was at a seasonally adjusted annual rate of $697.6 billion, 0.5 percent (±1.0%)* lower than the revised December estimate, with residential spending falling to $351.7 billion, 0.6 percent (±1.3%) below the revised December estimate and non-residential construction falling 1.6 percent (±1.0%) to $345.9 billion, while public construction spending was estimated at $273.8 billion annually, 2.6 percent (±2.0%) below the revised December estimate, largely on a downturn in public school construction.

Table 4 in the GDP report indicates that prices for residential construction grew at an annual rate of 4.5% in the 4th quarter, and that inflation for non-residential structures was at a 1.1% annual rate. To simplify our calculation, we’ll use a one month deflator of 0.4% on January residential construction, and a 0.1% deflator on non-residential construction. Furthermore, because the GDP categories for construction spending include brokers’ commissions, title insurance, state and local taxes, attorney fees, title escrow fees, fees for surveys and engineering services, and remodeling not captured by this report, the data here is not directly comparable to the data in the 4th quarter GDP report; so again we’ll have to generate our own comparable 4th quarter investment spending from the October, November and December data reported here. Thus we find that 4th quarter residential construction spending was at a seasonally adjusted annual rate of $353,520 billion. and hence January’s $351.7 billion spending deflated by 0.4% was .91% lower. decreasing at a 3.6% annual rate on a quarterly basis. We also find that non residential spending at $345.9 billion deflated by 0.1% in January was 1.2% lower than than 4th quarter non residential spending at a $349,800 billion rate and hence fell at an annual rate of 4.8% ; and that public construction spending of $273.8 billion in January deflated by 0.1% was 2.7% lower than 4th quarter public construction spending at a $281,012 annual rate and hence fell at a 10.2% annual rate in January. Eyeballing the percentages of GDP that each of these account for, we find that if January’s level of construction spending continues throughout the 1st quarter, reduced investment in residential structures could subtract 0.12% from 1st quarter growth, lower investment in nonresidential structures could subtract 0.13% from 1st quarter growth, and lower construction investment by governments could reduce 1st quarter GDP by 0.17%.

Real Equipment Investment and Inventories Rise in January

The Census Bureau also released the Full Report on Manufacturers’ Shipments, Inventories, & Orders for January (pdf), which showed new orders for manufactured goods fell by $0.9 billion or 0.2% to $470.0 billion, after falling a revised 3.5% in September, making this the 6th consecutive decrease in monthly factory orders. In addition, this report showed that unfilled orders also fell 0.2%, falling by $2.2 billion to $1,163.4 billion, on the heels of a 0.9% December decrease. The drop in January new orders was entirely due to a 3.1% drop in new orders for non-durable goods, which were clearly impacted by lower prices for refinery products and other oil-based chemicals and fertilizers.

While factory shipments are all included in GDP, most of those reported here will be included in one of the other components of GDP. For instance, some factory shipments are destined for export, some are destined for personal or government consumption, and so forth, and those factory shipments will be included in the pertinent component of GDP. Investment in equipment is the one category of factory shipments in this report that a GDP component can be estimated from, as investment is non-defense capital goods is often used as a proxy for equipment investment in GDP. Although shipments of non-defense capital goods grew at a 1.0% rate in January, finding a deflator for that is difficult, as each of the various categories of such capital goods would in turn, have to be deflated by the appropriate sub-index of the producer price index. Nonetheless, the greatest price rise in such equipment appears to be 0.9% for heavy motor trucks, while prices for some such as railroad equipment fell by 0.8%, so equipment investment looks firmly positive for January.

The change in all factory inventories, on the other hand, are included directly in GDP, along with other business and farm inventories, and we want to know if the change in inventories in the 1st quarter is greater than or less than the change in inventories was in the 4th quarter. As we explained when gauging the impact of December inventories on 4th quarter GDP, a difficulty here is that a portion of the factory inventories have been severely depressed in price, such as inventories at petroleum refineries, and other factory inventories with oil inputs such as chemicals and textiles were likely priced lower for the same reason. So while inventories for all manufacturing industries fell 0.4% in January, inventories for durable goods rose 0.4%, slightly less than the 0.5% inventory increases of each month in the fourth quarter. It was inventories of nondurable goods, which fell by 1.7%, that dragged down the total, but 13% of nondurable inventory on a current dollar basis was inventories at oil refineries, which were 11.3% lower in January after falling 11.4% in December. But prices for refinery products were down even more, with producer prices for gasoline off 24.0%, and prices for diesel fuel, home heating oil, and other distillates all falling more than 19%. Hence, we can say that real inventories at refineries were probably up 8%, and maybe more. and if we subtract refinery inventories from other non-durable goods. we find other inventories were only down a bit over 0.1%. However, factory prices for most of those non-durable goods fell as well, as producer prices for food were down 1.1% in January, while core producer prices were down 0.2%. Since food and beverage inventories, which increased by 0.1% in current dollars, account for roughly 30% of non-durable inventories, and chemical inventories, which fell by 1.3% but were down 9.2% in price, account for another 34% of the total, we can confidentially say there was a substantial build of real non-durable inventories in January as well.

(an even rougher version of the above was first posted at Marketwatch 666 )