the key release of this past week was the first revision to the advance estimate of 4th quarter GDP from the BEA, which showed that the economy grew at a 2.4% annual rate over the last  3 months of last year, not the 3.2% rate originally reported…the revision was not unexpected; as we pointed out in our coverage of the 1st estimate, December trade and inventory data had not yet been reported at the time, and the BEA estimates used in that advance estimate were both off the mark in the wrong direction…economists had already written down GDP starting with the 12% jump in the December trade deficit reported the following week, and then again when retail sales and industrial production for the months in question were both revised downward two weeks ago…we’ll look at the details from this report later in these notes…

another national report released this week was the national activity index for January from the Chicago Fed, which is a composite of 85 different economic metrics; the Chicago Fed found 44 of the 85 indicators to be negative in computing a monthly index of -0.39 in January, down from -0.03 in December, where values below zero indicate indicate below-average growth, and positive values indicate above-average growth; that brought the index’s three-month moving average down to +0.10 in January from +0.26 in December, still its fifth consecutive reading above zero…the most weakness was in the production-related indicators for January, which subtracted .36 from the index, after adding .06 in December…employment-related indicators added 0.13 to the index, up from 0.06 in December, while the consumption and housing indicators subtracted 0.18 in January after subtracting 0.14 in December, and there was a 0.02 contribution from the sales, orders, and inventories category after a negative 0.01 in December….

there were several reports on the manufacturing sector, including the release of three regional Fed manufacturing surveys for February… the Dallas Fed reported the tenth consecutive month of expansion for Texas area factories, with their production index rising from 7.1 to 10.8, while their general business activity index fell to zero after eight months of expansionary readings….meanwhile the Richmond Fed, reporting for an area which includes Virginia, Maryland, the Carolinas, the District of Columbia and most of West Virginia, indicated their composite index of manufacturing dipped to a reading of −6 in February following January’s reading of 12, wherein like the other Fed indexes, positive values indicate growth and negative values indicate contraction…meanwhile, the Kansas City Fed, surveying manufacturers in the tenth Fed District, which includes western Missouri, Colorado, Kansas, Nebraska, Oklahoma, Wyoming and northern New Mexico, reported their manufacturing composite index, an average of their production, new orders, employment, supplier delivery time, and raw materials inventory indexes, was at 4 in February, little changed from the reading of 5 in January and up from -3 in December…

in addition to the Fed manufacturing indexes, a survey of Chicago Purchasing Managers indicated that Midwest manufacturing was continued to grow at nearly the same rate in February as January, as their Chicago Business Barometer (pdf) rose 0.2% to 59.8% from 59.6% in January, as a double-digit gain in employment offset declines in new orders, production and backlogs…while all these reports are surveys of one sort or another, the hard data for manufacturing this week came in the form of the January Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders (pdf), which indicated that the widely watched new orders for durable goods were at $225.0 billion, 1.0% lower than new orders booked in December, the 3rd decrease over the last 4 months, while shipments of durable goods fell to $232.3 billion, 0.4% lower in January than December, unfilled orders rose 0.1% to $1,060.1 billion, and inventories rose 0.3% to $389.1 billion…excluding the volatile transportation sector, new orders for durable goods rose 1.1% to $157,685 million; new orders for non-defense capital equipment fell 3.9% to $78,312 million, but that was mostly due to a 20.2% decrease in new orders for civilian aircraft…excluding volatile aircraft orders, new orders for core capital goods rose 1.7% to $68,758 million…our FRED graph below shows the monthly percentage change, plus or minus, for total new orders for durable goods in red, the change in new orders for capital goods excluding defense in green, and the change in new orders for core capital goods in blue for each month since the beginning of 2012..

FRED Graph

there were also several reports on the housing market, beginning with the release of the December Case-Shiller house price indexes on Tuesday, which showed that home prices fell by 0.1% for the second straight month in December, while the Composite 20 index indicated that year over year prices increased at a unsustainable 13.4% rate in the 20 metro areas covered since the December report last year….the quarterly national index, released at the same time, was down 0.3% from the 3rd quarter, while national home prices reportedly rose 11.3% from the 4th quarter last year, slightly more than the 11.2% annual price increase logged at the end of the 3rd quarter…the bar graph below, from Robert Oak’s coverage of this report at the economic populist, shows the year over year percentage change for homes in each of the 20 metro areas in the Case-Shiller Composite 20, plus the change in both that index and the original 10 city index in the two bars on the right…unfortunately, the incomes of most perspective home buyers did not go up by nearly the same percentage over that span..

December 2013 Case-Shiller one year change

on Wednesday, the Census Bureau released their report on New Home Sales in January (pdf), in which they estimated sales new single-family houses were at a seasonally adjusted annual rate of 468,000, which would be “9.6 percent (±17.9%)* above the revised December rate” and “2.2 percent (±20.2%)* above the year ago rate”….the asterisks in this report, as you should all know, lead to a footnote that tells us that due to sampling variability, nonreporting, and undercoverage, Census is uncertain whether there was an increase or decrease in new home sales on a monthly or even an annual basis…that uncertainty didn’t stop the blogs and media from reporting it as the highest sales rate since 2008...the reality is much less impressive, as being January, the estimated 34,000 new homes sold in January as extrapolated from Census field agents estimates was just 2,000 more than were estimated sold in both December and January of last year, and sales could be a fifth more or less than that, who knows?…then another report from the National Association of Realtors reported that their pending home sales index, based on contracts to purchase previously owned homes, was up 0.1% to 95.0 in January from December, but 9.0% below the reading of 104.4 from January of last yearwhile the NAR blamed the weather, the index was up 2.3% in the cold Northeast, while it dropped by 4.8% in the West, where temperatures were above normal…the Mortgage Bankers Association’s weekly report indicated mortgage applications fell 8.5% in the week ending February 21st and were at a seasonally adjusted 19 year low; that could well be weather-related..

4th Quarter GDP Revised to a 2.4% Growth Rate on Lower Consumer Spending, Inventories, Net Exports

as we mentioned in opening, there was a rather large negative revision to GDP for the 4th quarter of 2012, with significant changes to every component except for the government sectors, so we’ll look at that release in more detail to see what changes that entails…the second estimate (aka the preliminary estimate) of Gross Domestic Product for the Fourth Quarter of 2013 (full pdf with tables here) indicated that our seasonally adjusted real output of goods and services rose at a 2.38% annual rate in the 4th quarter, revised down from the originally reported 3.23% growth rate, and down from a growth rate of 4.1% the third quarter…the growth rate for the entire year, that is, 2013 over 2012,  was unrevised at 1.9%, based on inflation adjusted output of $15,759.0 billion in chained 2009 dollars; the total output in goods and services in current dollars for the year just ended was $16,797.5 billion, 3.4% greater than the then current dollar GDP of $16,244.6 billion in 2012…however, since the change in “real” GDP being reported here is not a measure of the dollar value of our GDP but a measure of the change in our units of output, all percentage changes cited in this report are adjusted for inflation using chained 2009 dollars…and remember, all the quarterly percentage changes noted herein are at an annual rate, ie, written as if the actual growth in the quarter were extrapolated over an entire year…

the seasonally adjusted growth rate in real personal consumption expenditures, which were originally reported to have increased at a 3.3% annual rate, have been revised to show they had only increased at a 2.6% annual rate, mostly due to a markdown of goods consumption, which we saw coming with the downward revisions to November and December retail sales embedded in the January report two weeks ago…the growth in real personal consumption of goods, which was originally reported growing at a 4.9% annual rate in the 4th quarter, was revised to a 3.2% annual rate, with real consumption of durable goods revised from the originally reported 5.9% growth rate to a growth rate of 2.5%, as motor vehicles purchased fell 0.7% from the 3rd quarter rather than growing at a 2.0% rate as reported last month; in addition, the growth in real consumption of non-durable goods was revised from 4.4% to 3.5%, with more than a third of that growth in food consumption, while the growth in real consumption of services was revised from the 2.5% growth rate reported in the advance report to 2.2% in this preliminary estimate, as real outlays for food services and accommodations still rose at a 13.0% annual rate…as a result of these revisions, personal consumption expenditures added 1.73% to the quarter’s GDP growth rate of 2.38%, rather that the 2.26% they were first reported adding to the 3.23% growth rate; most of that was from services, which added a full 1.00% to GDP, while growth in non durable goods consumption added .54% and increased consumption of durable goods added .19% to the 4th quarter growth rate…

real gross private domestic investment, which had been reported as growing at a seasonally adjusted annual rate of 3.4%, was actually revised upwards to a growth rate of 4.5%, despite a large downward revision to the change in private inventories, so investment added .72% to the quarter’s growth rather than the the .56% reported last month…real fixed private investment, which had been reported growing at 0.9% rate, is now revised to have increased at a 3.8% annual rate in the fourth quarter… of that, real nonresidential fixed investment increased at a 7.3% rate rather than the 3.8% first reported, as real investment in structures was revised from a 1.2% contraction to show a 0.2% growth rate, investment in equipment was revised to a 10.6% growth rate from the originally reported 6.9% growth, and the growth in investment in intellectual property was revised from 3.2% to 8.0%…as a result of these revisions, investment in structures added .01% to GDP, investment in equipment added .56%, and investment in intellectual property added .32% to 4th quarter growth…in addition, the contraction in real residential fixed investment at 8.7% was not as severe as the originally reported 9.8% decrease, and just subtracted .29% from GDP rather than the .32% first thought, while the inflation adjusted change in private inventories was marked down to $1.7 billion and contributed just .14% to GDP, not the .42% originally reported…

a large part of the gains to GDP we thought we had from net exports went down the tubes with the much larger than expected trade deficit posted in December…the BEA originally estimated that our 4th quarter exports had risen at an inflation adjusted 11.4% rate while imports only increased by a 0.9% rate; after they got the actual data for December and other revisions, they now estimate that real exports of goods and services increased at a 9.4% rate in the fourth quarter, while real imports increased at a 1.5% rate…as you should recall, exports add to gross domestic product because they are products that are not consumed or added to investment in our country, while imports subtract from GDP because they represent either consumption or investment that was not produced here…thus both the downward revision to exports and upward revision to imports generated downward revisions to GDP…the change in real exports, which had been seen as adding 1.48% to the 4th quarter’s growth rate, are now seen as only having contributed 1.22%, while the increase in real imports, which were thought to have clipped just 0.15% from 4th quarter growth, are now seen to have subtracted 0.24%…by the way, this report is the last where we will have a reasonably accurate estimate of real imports and exports, because the Bureau of Labor Statistics, which had been charged with gathering the statistics on import and export prices, announced on Tuesday that they would cut the International Price Program, which had been the facility used to gather that data, due to sequestered budget cuts..

although there were only minor revisions to the change in government consumption and investment in this second estimate, government remained a major drag on 4th quarter GDP figures, in large part because of the October partial Federal shutdown…federal government gross investment and consumption expenditures fell at an annual rate of 12.8% in the fourth quarter and subtracted a full 1.00% from the quarter’s annual growth rate, not much change from the 12.6% decline in federal government outlays first reported…that included a reduction in defense spending at a 14.4% annual rate, which reduced GDP by 0.70%, and 10.1% lower investment and consumption expenditures annualized, which subtracted 0.30% from 4th quarter growth…meanwhile, consumption and investment outlays by state and local governments fell at a 0.5 percent rate and subtracted 0.5% from GDP; they were originally reported to have increased outlays by the same rate…

our FRED bar graph below has been updated with these latest GDP revisions…each color coded bar shows the change, in billions of chained 2009 dollars, in one of the major components of GDP, over each quarter for the last eleven quarters; in each quarterly grouping of seven bars on this graph below, the quarterly changes in real personal consumption expenditures are shown in blue, the changes in gross private investment, including structures, equipment and intangibles, are shown in red, the change in imports are shown in green, the change in exports are shown in purple, and the change in private inventories is in yellow, while the change in state and local government spending and  investment is shown in pink, while the change in Federal government spending and investment is shown in grey…those components of GDP that contracted in a given quarter are shown below the zero line and subtract from GDP, those that are above the line grew during that quarter and added to GDP; the exception to that is imports in green, which subtract from GDP, and which are shown on this chart as a negative, so when imports shrink, they will appear above the line as an addition to GDP, and when they increase, as they have in the recent quarter, they’ll appear below the zero line…as we can see, it’s been consumer spending in blue and business investment in red that have been driving economic growth, while increasing imports in green and cuts to federal spending in grey have been the largest economic drags…

FRED Graph

it’s often said that personal consumption is 70% of GDP, a figure we’ve quoted in the past as well…but strictly speaking, it’s not really, because one component of GDP has long been negative…in the simplest calculation, GDP is the sum of personal consumption expenditures, gross private domestic investment, net exports, and gross government investment and consumption expenditures….in looking at those components in current dollars as a percentage of current dollar GDP for the year just ended ($16,797.5 billion), we find that personal consumption expenditures at $11,496.2 billion were 68.4% of the total, gross private domestic investment at $2,673.7 billion was 15.9% of GDP, gross government investment and consumption expenditures at $3,124.9 billion was 18.6% of GDP, and net exports (exports of $2,259.8 billion minus imports of $2,757.0 billion) at $497.3 billion was a negative 3.0% of GDP….so in that perspective, personal consumption barely approaches 70% of the 103% of the positive GDP components, and is really much less than 70% of all the positive sums involved….

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