in a few days we’ll know which of the two upcoming budget crises we’ll face; as it seems unlikely that we’ll get through the month without either a shutdown of “non-essential” government operations or a debt ceiling crisis which could lead to a US default…the stop-gap spending bill that was passed by the House late last week went to the Senate, where after the necessary procedural moves and a brief filibuster, the language defunding Obamacare was stripped out, and a clean continuing resolution to fund the government till Dec 15 at the same levels as it is currently was passed and sent back to the House, where the Republicans again attached an amendment, this time delaying the start of Obamacare for one year and repealing an associated medical device tax, which Obama has already said he’d veto, making an Oct 1st government shutdown increasing likely…meanwhile, even after loading up a debt ceiling bill with a dozen right wing priorities, including a delay of the health insurance individual mandate, approval of the Keystone XL pipeline, opening the coasts to offshore oil drilling, a Ryanesque fast-track tax reform authority, gutting several provisions of Dodd-Frank, moving funding of the Consumer Financial Protection Bureau to house appropriations, et al, Boehner was still unable to push it past the hard liners in his own party…at this point no one is negotiating, everyone is presenting their demands, so it’s hard to see how either the stop-gap pending bill or the debt ceiling gets resolved

ALFRED Graph

while last week we saw that 15% of us remain stuck in poverty and the real median income for working Americans is still below the levels first reached in 1989, this week we discover that U.S. Household Wealth has hit an all time peak of $74.8 trillion…the 2nd Quarter Flow of Funds, Balance Sheets and Integrated Accounts (pdf) from the Fed showed that the difference between US households’ assets and liabilities was at $74.821 trillion at the end of the second quarter, $1.342 trillion, or 1.8% more than the revised $73.479 trillion in household net worth at the end of the first quarter, due in part to an increase of $525 billion in the value of real estate and a $300 billion increase in the value of household owned stocks, bonds and and mutual funds; the Fed doesn’t say, but based on the Census count of households, that’s an average of $651,970 per household; everyone with less is below average…household debt was up at an annual rate of 0.2% to $12970.6 billion, as mortgage debt decreased 1.7% to $9345.8 billion and consumer credit rose at an annual rate of 5.6% to $3010.7 billion…total non-financial debt in the system increased at a 0.8% rate to a seasonally adjusted $41041.4 billion, as nonfinancial business debt rose at an annual rate of 6.9% to $13103.4 billion, state and local government debt rose at an annual rate of 1.1% to 3006.4 billion, and external federal government debt rose at an annual rate of 2.5% to $11960.9 billion…

normally, this report would not be noteworthy, but this release was the first quarterly flow of funds since the comprehensive benchmark revision to the national products accounts which, as we saw, dramatically altered the reports on GDP, personal income and spending…although we briefly mentioned that using an accrual approach for measuring defined benefit pension plans resulted in upward revisions to personal income, we didn’t get into much detail about what that meant…this time, we’ll quote:  “the comprehensive revision moves the accounting for defined-benefit (DB) pensions from a cash basis (related to the sponsors’ funding of the plans) to an accrual basis (related to households’ earnings of pension benefits)”…and as it relates to household wealth: “the Financial Accounts of the United States now account for the level and flow of “pension entitlements,” which are the present value of accrued defined-benefit benefits. Where previously only the assets of DB plans were tracked (and treated as an asset of the household sector), now pension entitlements are shown as an asset of the household sector and as a liability of the pension fund sectors” …so, what that means is that our household wealth now includes “pension entitlements”, whether they’re funded or not; the level of these pension entitlements for the 2nd quarter is now at $18,736.61 billion, up from $18,560.9 billion in the first quarter, which includes now includes an upward revision of $3.6 trillion…our ALFRED graph to the right above shows how this change impacted reported household wealth; blue shows what household wealth was under the old accounting method over the past 15 years, while the red graphs shows what historical household wealth is now reported at, incorporating the change…(note that assets of non-profit organizations serving households has always been lumped in with household wealth)…by way of example, a year ago we reported that in the flow of funds report showed household net worth was at $62.7 trillion at the end of the second quarter of 2012; in this latest report, table B.100 “Balance Sheet of Households and Nonprofit Organizations” (pdf), household wealth for the second quarter of 2012 is now listed as $67,130.7 billion…

this week also saw the release of the Third Estimate for 2nd quarter GDP from the BEA (Bureau of Economic Analysis) and, unlike many other such revised estimates we’ve seen, there was little change this time; the headlines read that the economy grew at a seasonally adjusted 2.5 percent annual rate in the spring quarter, unchanged from the previous report, but it was in fact fractionally less, at a 2.48% rate vs the 2.52% growth rate that the 2nd estimate yielded when computed to two decimal places…nominal GDP rose from the $16,535.3 billion seasonally adjusted and annualized figure reported in the first quarter to an annualized $16,661.0 billion with this final revision, which gives us a current dollar annual growth rate of 3.07%, while the 2nd quarter GDP in chained 2009 dollars, on which the 2.48% growth rate and all other percentages in this report are based, rose $95.8 billion to $15,679.7 billion from the 1st quarter’s $15,583.9 billion…on a year over year basis, GDP has increased $252.0 billion in chained 2009 dollars, which gives us an anemic 1.63% growth rate for the 12 months ending June…

since this third estimate didn’t show much change from the  2nd estimate of 2nd quarter GDP, which we covered quite thoroughly, we’ll just briefly highlight what changed in this week’s release…personal consumption expenditures at an annual rate of $11,427.1 trillion were up 1.8% from the first quarter and virtually unchanged from the 2nd estimate; they accounted for exactly half of the growth in the second quarter…spending on durable goods was up at a 6.2% rate, a bit more than the 6.1% rate of increase indicated in the last report, while the increase in spending on non-durable goods was 0.2%, less than reported last month at 1.6%, while personal outlays for services increased at a 1.2% annual rate, up from the 1.1% rate of increase reported in the 2nd estimate…spending on durables added .46% to the 2.48% annual rate of increase for the quarter, while spending on non-durables contributed .26% to GDP and spending for services added .53%…

fixed private investment was up at a 6.5% annual rate, somewhat more than the 6.0% rate of increase reported last month; non-residential investment increased at a 4.7% rate, as investment in private structures increased 17.6% from the first quarter, a jump from the 16.1% increase approximated by the 2nd estimate; investment in equipment increased at a 3.3% annual rate, revised from 2.9%, and investment in intellectual property fell 1.5%, a greater contraction than the 0.9% reported by the 2nd reading…meanwhile, investment in residential property was up at a 14.2% annual rate from the first quarter to the second, more than the 12.9% rate of increase estimated at the end of August…as a result of these changes, growth in non-residential structures now contributed .45% to 2nd quarter growth, while residential added .40%, equipment added .18% and intellectual property subtracted .06% from 2nd quarter GDP…

one larger change between the 2nd and 3rd estimate was a downward revision to inventory investment, most of which was a downward revisions to retail trade industries…reported last month as a $85 billion increase in inventories from the 1st quarter to the 2nd, that’s now been revised to a $77.2 billion QoQ rate of increase, which is even lower than the 1st estimate, which came in at $78.7 billion…the result was that inventories contributed .41% annualized to 2nd quarter GDP growth, not the .55% approximated last month..

2nd quarter export growth was also a little weaker than the 2nd estimate indicated, as it also trended back to the levels reported in the 1st estimate…real exports of goods and services were reported to have increased at an annualized 8.6% rate in the second estimate, but in this 3rd estimate it’s now indicated as growing at a 8.0% rate…the rate of increase in 2nd quarter imports was also written down a bit, from 7.0% in the 2nd estimate to 6.9% in this report…as a result of these changes, the growth in imports, which subtracted 1.10% to the change in 2nd quarter GDP, was greater than the 1.04% contribution to GDP added by exports…

the charge indicated in the contribution from state and local governments to 2nd quarter GDP by the 3rd estimate was also closer to the 1st estimate than the 2nd; instead of decreasing at a 0.5% rate as was reported at the end of August, investment and consumption spending by state and and local governments rose at a 0.4% rate in the 2nd quarter, just a fraction more than the 0.3% increase indicated from that government sector by the advance estimate of 2nd quarter GDP released in July….meanwhile, federal outlays decreased at a 1.6% rate in the 2nd quarter, which was the same decrease in federal spending reported in the second estimate…so while state and local governments finally made a small .05% contribution to GDP, the decrease in federal outlays took .12% away, leaving government as a drag on the 2nd quarter, much as it has been throughout this recovery…

the zero hedge bar graph above is a visual representation of how each of these major GDP components have impacted the quarterly result since the 2nd quarter of 2011, with the net quarterly change in GDP at an annual rate tracked by a black line; additionally, the pinkish shaded box includes a similar visualization of the differences between the first, second and third estimates for the 2nd quarter…if you click to enlarge it you’ll see that the dark blue in each bar represents the increase in personal consumption expenditures for each quarter,  the red in each bar represents the change in fixed investment for that quarter, while the change in private inventories, the other investment category, is shown in green, with additions to GDP above the red dashed “0.00%” line and subtractions, representing a component that had contracted during the quarter, below it…in addition, the change in exports, which adds GDP when its growing and subtracts when it contracts, is shown in purple, while the opposite is true for a positive change in imports, shown in teal blue; they subtract from GDP when growing while a shrinkage of imports would be an addition to GDP and be shown above the red ‘0’ line…lastly, in orange, the graph shows the change in government consumption and investment, which has subtracted from GDP for every recovery quarter shown except for Q2 & Q3 of 2012…clearly, it’s been consumers in blue and fixed investment in red that have provided most of the growth over the last two years..

in addition to data on GDP and its components, this report included revised estimates of 2nd quarter inflation based on prices changes in national income & product accounts…the GDP deflator, which is used to convert nominal GDP changes into real dollars and hence is the broadest measure of inflation, increased at an annual rate of just 0.6% in the 2nd quarter; meanwhile, the deflator for personal consumption expenditures, which the Fed has targeted at 2.5%, has now actually fallen at a annual rate of 0.1% in the 2nd quarter, rather than unchanged as previously reported (it might be more appropriate to call it a PCE inflator)…the deflator for goods indicated 3.3% goods deflation at an annual rate in the 2nd quarter, and hence raised their value by that much in the GDP computation, while the deflator for services indicated an annual inflation rate of 1.6% for services, and hence lowered their contribution to GDP by that percentage..

…..

the key monthly release of the past week was also from the BEA, on Personal Income and Outlays for August;  which gives us the first look at personal consumption expenditures for the month, which as we’ve seen has been the critical component of GDP during the recovery; it also includes data on 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 inflation gauge the Fed targets…a footnote tells us that the income data in this report reflects revisions from January to March due to the inclusion of the recently available first-quarter wage and salary data from the BLS…

overall, this month’s report shows an improvement from recent months, although it’s a source of some confused misreporting in the press…the BEA opens by telling us seasonally adjusted personal income for August increased by $57.2 billion, or 0.4 percent over July’s level; however, what their news release fails to mention is that the $57.2 billion is an annualized figure, which means that August’s personal income gains, if extrapolated over an entire year, would increase annual personal income from $14,131.0 billion to $14,188.2 billion….in a similar manner, annualized disposable personal income (DPI), or income after taxes, increased by $56.2 billion to $12,522.8 billion, which was a 0.5% increase over July’s DPI, making August income increases the largest since February…and unlike last month, when incomes from wages and salaries reported fell at a $15.3 billion rate, income from private wages and salaries increased at a $28.5 billion rate in August…even wages and salaries from government jobs increased at a $2.0 billion rate in August, in contrast to a decrease of $7.6 billion in July, despite being reduced by $7.3 billion in August and $7.7 billion in July due to sequester related furloughs…business proprietors incomes also rose by $5.0 billion in August, compared with an increase of $2.3 billion in July, and farm owners incomes we up at a $7.9 billion rate…in addition, personal rental income increased $7.6 billion in August, while personal income from receipts on assets (interest and dividend income) decreased $4.5 billion, in contrast to an increase at a $13.6 billion rate in July…although rental income and dividends account for less than 10% of all income, they have accounted for 25% of the increase in all earnings over the last 4 years

personal consumption expenditures (PCE) increased 0.3% in August and were up at an annual rate of $34.5 billion to an annualized $11,528.8 billion; of that, spending for durable goods increased at a $6.7 billion rate to $1,274.4 billion, and spending on non-durables was down by $0.5 billion to an annualized $2,635.1 billion, while spending for services was up at a $28.3 billion rate to $7,619.3 billion…..total personal outlays during August, which includes interest payments, and personal transfer payments in addition to PCE, increased by an annualized $38.4 billion to $11,942.2 billion, which left personal savings, which is disposable personal income less total outlays, at $580.7 billion for the month, which was the largest monthly savings this year… as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, was at 4.6% in August, up from 4.5% in July and the highest savings rate since May..

the price index for personal consumption expenditures, based on 2009 = 100, was at 107.423 in August, nominally a 0.1% increase from July’s 107.276 reading; the core PCE price index, which removes food and energy, was at 106.131, up 0.2% for the month…the year over year change in the headline PCE price index works out to an increase of 1.15%, and the year over year Core PCE price index, which the Fed has targeted at 2.50%, is at 1.23%, 0.1%  higher than last month’s 1.13% year over year level…as a result, real disposable personal income, which is DPI adjusted for PCE inflation, increased 0.3% in August, after being up 0.2% in July…real PCE, which is personal consumption expenditures adjusted for inflation using the PCE price index, increased 0.2% or $17.5 billion annualized in August, after being up 0.1% or $7.2 billion in July…thus for the 3rd quarter to date, real PCE has increased at a $24.7 billion rate, or at a 1.4% annual rate, which indicates a weak contribution to 3rd quarter GDP…our FRED graph below shows monthly real disposable personal income in blue and real personal consumption expenditures in red since January 2000, with the scale in chained 2009 dollars for both on the left; also shown in green is the monthly personal savings rate over the same period, with the scale as a percentage of DPI on the right….although it may appear from the graph that real disposable income has been accelerating over the past 13 years, real DPI below is not adjusted for increases in the population…on a per capita basis, real DPI is up just 18.3% over the span of this graph…and we already know the lion’s share of that has gone to the rentier class…

FRED Graph

the August Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf) from the Census Bureau also may give us some insight into the direction of the 3rd quarter GDP, as its data inputs into equipment investment, consumer durable goods spending, government and military spending, inventories and exports…while most reported that new orders were up slightly in August, as they rose 0.1%, few made note of the fact that July durable goods orders, which we previously reported showed a widespread contraction while shrinking 7.3% in July, were revised down to an even greater 8.1% decrease…while that does not bode well for the future, new orders are notoriously noisy, so we’ll also look at shipments and inventories with and eye to their impact on the current quarter…

seasonally adjusted new orders for manufactured durable goods increased $0.3 billion in August to $224.9 billion, which as we’ve already mentioned was a 0.1% increase from July’s depressed level; that means that August orders were still 8.0% the new orders rate of $244.4 billion that we saw in June…there was a 0.7% increase to $67,909 million in new orders for transportation equipment, led by a 2.4% jump in new orders for vehicles and parts, however, that came on the heals of a 21.9% decrease in orders for transportation goods, as June transport orders came in at $86,387…new orders less transports, a popular metric which strips out volatile aircraft orders, were down 0.1% in August after a revised 0.5% decrease in July…new orders for defense aircraft, another volatile category, were down 11.8% after being down 3.1% in July; however they just account for $4,479 million on the books, less than 2% of the total…but there’s not much volatile about new orders for computers and electronic equipment, which were down 3.4% in August after being down 2.4% in July; their new orders have now shrunk to $20,775 million from $22,069 million in June…but it’s new orders for capital goods where the real weakness lies, down another 0.8% after being down 18.1% in July, which means new orders for capital goods at $84,285 million are now running nearly 19% below the June level of $103,795 million…even stripping out defense capital goods and aircraft, orders for so called core capital goods were at $68,379 in August, 1.9% below the June core capital goods orders of $69,695…were it not for new orders for new cars, new orders for durable goods would be a real train wreck…

our FRED bar graph below shows the month to month change of several of these durable goods categories, beginning in January of 2012…in each month, 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; followed by a bar in green which shows the change in new orders ex-defense; while in orange, we have special consumer 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 would be included in the equipment investment category of GDP…on that graph, the August / September change shows what should have happened if the change was just from abnormally volatile orders; after the downturn comes a rebound…but after the downturn in July this year, new orders in August didn’t do squat…

FRED Graph

as bad as new orders were, it’s the value of shipments of durable goods over July, August and September that will more closely impact third quarter GDP than new orders, which in many cases have lead times in months…overall, August seasonally adjusted shipments of manufactured durable goods increased $2.1 billion to $231.466 billion, which is a 0.9% increase over total July shipments of $229.353 billion, which was down 0.1% from June’s level of $229,600…shipments of transportation equipment, up 1.5% in August to $69,738 million, led the increase, with shipments of motor vehicles up 1.9% driving that increase, as shipments of non-defense aircraft fell 5.1%…shipments of machinery were up 0.4% to $33,705 million after falling 1.5% in July, and shipments of computers and electronic equipment rose 1.3% in August to $27,576 million after a 1.1% contraction in July…overall shipments of capital goods also partially rebounded from a 1.9% pullback in July, as they rose 1.3% in August to $83,941 million; of that, shipments of non-defense capital goods rose 0.4% to $73,808 million after falling 1.4% in July…

seasonally adjusted inventories of durable goods were up 0.1% in August to a new record high of $379,084 million, which in turn followed the 0.3% increase in July…inventories of transportation equipment, up 0.3% and valued at $117,280 million, again led the increase, as transportation equipment inventories were also up 0.6% in July; inventories of motor vehicles increased 0.7% and inventories of non-defense aircraft were up 1.3%, while military aircraft and parts inventories fell 3.6%….excluding transportation inventories, all other inventories were virtually unchanged, as they fell by less than 0.1%…inventories of computers and electronic equipment were down 0.6% to $46,374 million, although inventories of communication gear rose 1.3%…inventories of electrical equipment, appliances, and components rose 0.5% after being up 0.2% in July, and overall capital goods inventories increased 0.1% as well, to $194,624 million, after increasing 0.3% in July…our FRED graph below shows the ratio of durable goods inventories to shipments in blue with the scale on the left, and the ratio of inventories to unfilled durable goods orders in red with the scale on the left…concerns that there has been an excessive build of inventories appear unfounded, at least for durable goods…

FRED Graph

(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…)