well, we finally had a GDP revision that was positive and better than expected… based on more complete source data than available last month, the second estimate of Gross Domestic Product for the 2nd quarter from the BEA showed that our output of goods and services increased at an annual rate of 2.5% in the second quarter, not the 1.7% increase reported last month…nominal GDP rose from the $16,535.3 billion seasonally adjusted and annualized figure reported in the first quarter to an annualized $16,667.9 billion with this revision, while 2nd quarter GDP in chained 2009 dollars, on which all calculations and percentages in this report are based, rose $97.1 billion to $15,681.0 billion from the 1st quarter’s $15,583.9 billion…on a year over year basis, the economy has still only grown at an anemic 1.6% rate, as growth rates of 1.15% in the 1st quarter and 0.14% in the 4th quarter of last year dragged  the overall annual growth rate down…

the consumer sector, which is responsible for 70% of GDP, contributed less than half of the second quarter’s growth, although reported consumer outlays were only down fractionally from the first estimate…second quarter personal consumption expenditures increased at an annual rate of 1.8% to a seasonally adjusted $11,429.9 billion annualized figure and contributed 1.21% to the 2nd quarter’s 2.52% annual growth rate…consumer spending on durable goods increased at a 6.1% annual rate to $1,257.2 billion annualized and contributed .45% to the quarter’s growth rate; spending on nondurable goods increased at a 1.8% rate to $2,591.9 billion and contributed .28%, while personal outlays for services increased at a 1.1% annual rate to $7,527.4 billion and contributed 0.48% to the increase in 2nd quarter GDP…note that the dollar amounts quoted here are in today’s dollars, while the percentage changes are adjusted for inflation and computed using chained 2009 dollars..

gross private investment increased from the first estimate, mostly due to an upward revision in private inventories…fixed investment increased at a seasonally adjusted annual rate of 6.0% to $2,541.1 billion and contributed .90 to the 2nd quarter growth rate, a bit less than the first estimate indicated…non residential investment increased at a 4.4% annual rate to $2,029.3 billion and contributed .53% to 2nd quarter growth…of that, investment in structures increased at a 16.1% annual rater to $451.3 billion, investment in equipment was up at a 2.9% annual rate to $933.9 billion, and investment in intellectual property shrunk at a 0.9% rate to $644.2 billion…meanwhile, residential investment increased at a 12.9% annual rate in the 2nd quarter to an annualized $511.7 billion and contributed .37% to the quarter’s growth rate, and private inventories increased by a seasonally adjusted $85.0 billion and added 0.59% to the second-quarter GDP rate of change…that’s an increase from the $78.7 billion increase in inventories reported last month, which was then indicated as a 0.41% addition to GDP..

2nd take 2nd quarter GDP ZH

the seasonally adjusted change in net exports was the major revision in the change in reported GDP from last month, as the increase in exports from the 1st to the 2nd quarter was greater than first reported, while the increase in imports was less; real exports of goods and services increased 8.6% to an annualized $2,242.2 billion in the second quarter, in contrast to the 5.4% increase reported last month (and in contrast to the 1.3% decrease in the first quarter)…this changed the contribution of exports to the 2nd quarter GDP growth rate from .71% to an addition of 1.11%; meanwhile, inflation adjusted imports increased at an annual rate of 7.0% to an annualized $2,748.3 billion, not the 9.5% rate of increase over the first quarter originally reported; as a result, instead of subtracting 1.51% from 2nd quarter growth rate, imports subtracted just 1.11%…as a result, instead of clipping 0.81% from 2nd quarter GDP, the quarter over quarter change in net exports was virtually nil and thus had no statistically significant impact on 2nd quarter GDP…

so, with decent contributions from consumers and investment and a wash from trade, that left only the change in government consumption expenditures and gross investment to subtract from 2nd quarter GDP; and federal outlays decreased at just a 1.6% rate in the 2nd quarter to an annualized $1,252.7 billion, compared to the decrease of 8.4% that took .82% off of first quarter GDP; the moderation was due to just a 0.6% fall in defense spending, in contrast to the 11.2% cut to defense in the first quarter…as a result, the reduction in federal spending only subtracted 0.12% from GDP (unchanged from last month’s first estimate); however, outlays and investments by state and local governments did not increase as was first reported; instead, state and local government spending decreased at a 0.5% rate to $1,865.3 billion, so instead of adding 0.04% to the annualized growth of 2nd quarter GDP, it subtracted 0.06%…

the zero hedge bar graph above gives us a visual representation of the contributions from each of these major GDP components since the 2nd quarter of 2011 and, in the pink box, the change in each from the first estimate of 2nd quarter GDP to the second estimate that we’ve just discussed; note that the dashed red line through the middle of the graph is 0.0%, and those components that add to GDP each quarter are above that line and those that subtract from GDP are below it, and the quarterly change in GDP at an annual rate is tracked  by the black line…the dark blue in each bar represents the increase in personal consumption expenditures for each quarter, while the red in each bar represents the change in fixed investment for that quarter, which was positive for every quarter shown except Q1 of 2013, which turned negative on a 25.7% shrinkage in non-residential construction…the change in private inventories, the other investment category, is shown in green; you can see the slightly larger segment for their increase in the revision vis-a-vis the 1st estimate in the pink box..then, the change in exports, which adds GDP, is shown in purple; hence, when exports fall, as they did in the first quarter, that shows up as a negative,  but when they rise, they add to GDP as they did in the 2nd quarter…conversely, a positive change in imports, shown in teal blue, subtracts from GDP and is shown below the line, while a shrinkage of imports would be an addition to GDP…in the graph above, you can see that the export increase in purple is the same size as the import increase in teal, and trade had no impact on second quarter GDP…lastly, in orange, the graph shows the change in government consumption and investment, which, except for Q2 & Q3 of 2012, has subtracted from GDP for every quarter shown.

FRED Graphnow, we’re about to add a caveat to this entire report, not that any such will change anything, but to shine a bit of light on the innards of how these numbers are arrived at…you may recall last month that as we reviewed the benchmark revision of the national income and product accounts going back to 1929, we made note that the change in the benchmark year for real variables in GDP from 2005 to 2009 would in effect increase the inflation adjusted basis of GDP and its components, as chained dollars from the deflationary year 2009 would be used instead of the earlier used chained dollars from the boom year of 2005…we also noted some apparent distortions in the way these chained 2009 dollars acted on the current data, specifically noting that it changed a decrease in the seasonally adjusted personal consumption expenditures on non-durable goods into an increase, a charge which persists in this revised data, as seasonally adjusted outlays for non-durable goods actually fell $15.1 billion, or 2.3%, from an annualized $2,607.0 billion in the first quarter to $2,591.9 billion in the second quarter, but in chained 2009 dollars, which are meant to adjust for inflation, it’s a 1.8% annualized increase, from $2,322.2 billion to $2,332.4 billion (see pdf table 3, page 8 line 9 for a side by side comparison); it seems dubious that there was that much deflation in the broad spectrum of non-durable goods in the second quarter as to boost the adjusted totals to that degree…

our FRED graph to the above right, developed after Robert Oak’s analysis of the revisions to the National Income and Product Accounts, shows the difference in the curves between the old GDP deflator and the one currently in use; the blue line, with the scale on the right, is the deflator based on chained 2005 dollars that was used by the BEA as a divisor to adjust for inflation prior to the benchmark revision, while the red line, with it’s scale on the left, is the GDP deflator currently in use, based on chained 2009 dollars, which is currently used to adjust for inflation; the point is not that one is wrong and the other isn’t, but that the curves are different, yielding a slightly different change to GDP over time, not because of any fundamental difference in our output of goods and services, but because of the change in the divisor used to adjust GDP for inflation…

the key new release this week, on July Personal Income and Outlays from the BEA, gives us the first big piece of data that will be inputted into the 3rd quarter GDP, personal consumption expenditures (PCE), which as we’ve noted, accounts for roughly 70% of the economy; it also provides data on national personal income and disposable income after taxes, total personal savings and the national savings rate, as well as the price index for PCE, which the Fed uses as it’s inflation gauge when setting monetary policy…however, not much of what we see in this report is encouraging…

gross personal income increased in July at a seasonally adjusted annual rate of $14.1 billion, or 0.1%, to what would work out to $14,115.0 billion if July’s incomes were extrapolated over a year, and disposable personal income (DPI), which is income after taxes, increased at an annual rate of $21.7 billion over the month to an annualized $12,446.9 billion, a bit less than 0.2%…personal income of individuals still remains $302.5 billion below the year end annual rate of $14,420.2 billion, which was inflated by tax-related accelerated dividends and bonuses at year end, and DPI still remains $382.3 billion, or nearly 3.0%, below it’s year end annual rate of $12,829.2 billion, which is in part a function of the expiration of the payroll tax cuts at year end…

not much of the increase in July incomes resulted from working; private wages and salaries fell at a $15.3 billion clip in July, in contrast to an increase at $31.3 billion in June, when personal income increased at a 0.3% rate; government payrolls also shrank at a $6.4 billion rate in July, more than the $0.8 billion hit they took in June, due mostly to sequester related furloughs…business owners, however, saw incomes increase at a $7.4 billion rate; most of that was a $6.2 billion increase in farmer’s incomes, which had been down $24.6 billion in June…meanwhile, individual’s rental income increased $7.9 billion in July, and interest and dividend incomes saw a $13.3 billion increase, less than the increase of $22.1 billion that category saw in June…in addition, transfer payments, which includes social security, medicare, unemployment comp and the like, increased $4.4 billion, and employee contributions to social insurance programs. which is a subtraction from personal income figures, decreased at a $2.8 billion pace in July..

personal consumption expenditures (PCE), which had been holding up in the face of lower disposable personal income (up 0.2% in May and 0.6% in June, as revised), increased at just a $16.3 billion rate to $11,495.8. billion in June, an increase of bit more than 0.1%; spending for durable goods was down at a $2.5 billion rate to $1,264.0 billion, outlays for non-durables increased $22.4 billion to an annualized $2,639.2 billion, while spending for services fell $3.7 billion to a seasonally adjusted annual rate of $7,592.5 billion…year to date, spending is up at a $195.2 billion annual rate, despite lower disposable personal income over the same period…total personal outlays, which includes interest payments, and personal transfer payments in addition to PCE, were up $18.4 billion in July to $11,902.4 billion…this left personal savings, which is disposable personal income less total outlays, at $544.5 billion in July, up a bit from the annualized $541.2 billion savings in June; still, the personal saving rate, which is personal savings as a percentage of disposable personal income, was at 4.4% in July, the same savings rate as in June…on the FRED graph below, we have the savings rate since 2000 tracked in green (with the percentage scale on the right margin)…year to date, it’s been tracking below the post recession trend, not unlike the boom years…also evident is the December spike in that rate that resulted from one time manipulations of bonuses and dividends paid out before the fiscal cliff…

FRED Graph

the other two metrics shown on the above FRED graph are real personal consumption expenditures (PCE) in red and real disposable personal income (DPI) in blue, adjusted for inflation using the PCE price index, which also accompanies this release…the price index for personal consumption expenditures, based on 2009 = 100, was at 107.343 in July, up from 107.244 in June, an increase of 0.1%…as a result, real DPI increased 0.1% in July, in contrast to a decrease of 0.2% in June, when the PCE price index was up by 0.4%…on the other hand, real PCE, adjusted for price changes, was up less than 0.1% (rounded to 0.0%)…breaking it down further, the price index for durable goods fell 0.3% from 94.980 in June to 94.661 in July, while the price index for non-durables rose 0.3% from 111.876 to 112.226 and the larger price index for services rose 0.1% from 107.790 to 107.885…the PC index excluding food and energy, or the Core PCE index, rose from 105.960 in June to 106.043 in July, an increase of less than 0.1%,which is rounded up…year over year, the headline PCE price index computes out to a 1.39 increase, while the year over year increase in the Core PCE price index is just 1.20%…in general, the year over year change in the core PCE price index has been falling from near 2.0% to this present level over the past year and a half, during the time the Fed was targeting a 2.5% inflation rate…

another report from the past week that may give us some additional insight into how the 3rd quarter is shaping up is the Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders for July (pdf) from the Census bureau, which covers manufactured equipment and materials generally expected to last more than 3 years… like all advance reports, the data here is extrapolated from a small sample and will be revised next week when Full Report on Shipments, Inventories and Orders is released, but nonetheless this report does give us data that will eventually input into both personal consumption expenditures for items such as appliances and autos, and capital goods purchases by businesses which will similarly input into the investment category of GDP…so while this report is usually watched for new orders with a look to future manufacturing activity, we’ll take a look at the other metrics as well to see how they might play into 3rd quarter growth figures..

July orders fell more than expected as seasonally adjusted new orders for durable goods in July decreased $17.8 billion or 7.3% from $244.4 billion in June to $226.6 billion in July…unadjusted new orders fell 19.3% from $255.963 billion in June to $206.515 million in July, but year to date orders for the first seven months were at $1,575.410 billion, 3.3% higher than the $1,524.766 billion for the same period last year…all of the remaining number’s we’ll report on henceforth are from the seasonally adjusted data…

the major factor in the July drop in new orders was a 19.4% fall in new orders for transportation equipment, from $86.4 billion of new orders in June to $69.7 billion in July…most of this was accounted for by the collapse in orders for non-defense aircraft and parts to just $13,200 million, less than half of June’s $27,690 million….this was not unexpected, as Boeing had earlier reported they received just 90 orders for passenger jets in July, down from 287 big plane orders in June, and orders for the other major transport sector, motor vehicles and parts, even edged up a bit from $44,787 million in June to  $45,021 in July…orders for defense aircraft and parts, however, fell 2.2%, from $5,243 million to $5,129 million in July…because of the volatile nature of aircraft orders, many prefer to look at new orders ex-transportation; but even those new orders fell 0.6% over the month, from $157,973 million in June to $156,955 million in July…but we should point out that at the end of the quarter there wont be any picking and choosing what to count, and a paucity of aircraft orders will hurt the economy just as much as a shortfall in orders for refrigerators…

however, it wasn’t just a shortfall in new orders for aircraft that took July down…new orders for computers and electronic products were off 3.6% as well, down to $21,262 million in July from $22,063 million in new orders in June…orders for computers were especially hard hit, falling 19.9% from $2,334 million in June to $1,870 million in July…orders for communications equipment also fell, to $4,312 million in July, which was 5.5% lower than June’s new orders of 4,563 million…and  new orders for capital goods, which includes everything from construction and farm equipment to power plants and electromedical instruments, were down 16.1% month over month, from $103,963 million in June to $87,190 million in July, but again this measure of investment grade equipment includes aircraft and total defense industry orders, so a measure of non-defense capital goods excluding aircraft is also provided, and even excluding those volatile sectors, orders for those so called core capital goods were off 3.3%, from $69,856 million in June to $67,547 million July…in fact, other than that slight increase in orders for motor vehicles, the only other durable goods category that a better future was for fabricated metal products, which saw new orders grow a measly 0.4%, from $29,721 million to $29,838 million …it almost appears as if the spike in interest rates, which we suspected curtailed new home sales, may be influencing outlays for other large purchases as well…

our FRED bar graph below attempts to capture the month to month change of several of these durable goods categories…in each month from the beginning of 2012, the red bar indicates the percentage change in overall new orders for durable goods for that month; next in each month, the blue bar indicates the percentage change for all orders for durable goods except aircraft and defense; then in green we have a bar that shows the change in new orders ex-defense; comparing that to the red bar gives us a good idea how much defense spending influenced the change in any month..then in orange, we have another special category, new orders for consumer durables ex transportation; finally, in violet, we have the change in new orders for all non-defense capital goods including aircraft, which is a fair proxy for what’s included in the equipment investment category of GDP…obviously, July orders for durables was pretty bad no matter how we look at it…but august of last year was at least as bad if not worse, and it was reversed in September…so we’ll have to wait at least another month to see if there’s been a turning point, or if July was just an aberration..

FRED Graph

shipments of manufactured durable goods in July will affect one or another of the 3rd quarter GDP accounts, whether it be investment, export, government, or personal consumption…and in a mildly bad omen, seasonally adjusted shipments of durable goods in July slipped $0.8 billion, or 0.3% to $228.8 billion…but remember, GDP tracks the quarter to quarter change, so while down a bit in July is not encouraging, it doesn’t close the book; shipments were also down by small amounts in April and June in the 2nd quarter, but a strong May turned the quarter positive…

the greatest contraction in July shipments was of computers and electronic products, which shipped $0.9 billion less products in July, falling 3.2% from $27,533 in June  to $26,644 in July; again, it was shipments of computers and related products, which were off 22.6% in July, which dragged the sector down, as computer shipments fell from $2,393 million in June to $1,851 million in July…shipments of communications equipment also slipped, off 1.5% from $4,019 million to $3,958 million…but it’s the computers that are really in the dumper, as year to date shipments of computers are off 10.4% to $14,849 million…the only other durable manufacturing category that saw less shipments in July was transportation, where shipments fell 0.1% to $68,768 million, but all of that was due to a 4.6% decline in shipments of military aircraft and parts; motor vehicle shipments were up 0.7% from $44,813 million in June to $45,117 million in July, and shipments of non-defense aircraft and parts rose 1.3% from $11,994 million to $12,146 million…

seasonally adjusted inventories of manufactured durable goods continued to grow in July, increasing $1.3 billion or 0.4% to $379.1 billion, to another new high;  inventories of transportation equipment, increasing fourteen of the last fifteen months, are the story here, as they were up 0.6% to $117,061 million in July; ex transportation, inventories only grew 0.2%; the transportation inventory story was all aircraft; inventories of non-defense aircraft and parts were valued at $63,232 million in July, up 0.8% from June, while the value of defense aircraft and parts increased 1.4% to $13,997 million…inventories of motor vehicles and parts actually slipped a bit, valued at $25,025 million in June to $25,014 million worth in July…

unfilled orders for durable goods continued to grow in July, increasing a seasonally adjusted $4.4 billion or 0.4% to a new record at $1,034.3 billion; that’s a number 4.5 times July’s shipments, so even a month or two of reduced new orders shouldn’t slow production…unfilled orders for capital goods were up 0.5% to $779,748 million, which is an amount nearly 9.4 times July’s capital goods shipments…even unfilled orders for non-defense aircraft were up 0.2% over June to $460,232 million, which is nearly 38 times the value of the aircraft shipped in July…so while there’s always a possibly that a crisis of major proportions may result in widespread cancellations of orders already booked, absent that it doesn’t appear that Boeing and other durables manufacturers will be curtailing production anytime soon…

(the above is my weekly commentary that accompanied my sunday morning links emailing, which in turn was mostly selected from my weekly blog post on the global glass onion…if you’d be interested in getting my weekly emailing of selected links that accompanies these commentaries, most coming from the aforementioned GGO posts, contact me…)