August 2014 ISM’s Manufacturing Index improves and came in above expectations. The Consensus expected a slight downturn from 57.1 to 56.8, but the survey brought the index up to 59. The index is getting close to its 2004 peak just above 60, indicating that the manufacturing sector continues its recovery.
Steve Hansen indicates in his Analysis “This index had been in a general downtrend since mid 2011 – but now is trending up. This is the fifteenth month of expansion.” This index is volatile, but appears to be trending up. Looking forward to Sept’s survey results.
In another positive announcement today, Construction Spending also improved in August. Steve Hansen provides a great summary at his EconIntersect site. However, the 3 month rolling average of year-over-year growth is still decelerating.
And, so the saga continues, but this is actually great news for 3Q2014 GDP growth, now 2/3 through the quarter.
The major economic data announcements coming out this week are:
- ISM Manufacturing PMI Index comes out on Tuesday, Sept 2nd and is a key indicator for August. In July, the Index contracted indicating a slow down in 3Q2014 GDP growth. We are hoping for a slight rebound.
- ISM Non-Manufacturing (Services) PMI Index comes out on Thursday, Sept 4th. Experts believe it will contract this month, but I am hopeful that services will continue on its growth path.
- ADP Non-Farm Employment also is announced on Thursday. Most expect to see a slight improvement from last month.
- The BLS Non-Farm Employment and Unemployment Rate are both announced on Friday, Sept 5th to end the week. We expect the U/E rate to notch down towards 6% continuing its trek towards 5% full employment, its “natural” rate.
These are the only 3-Star indicators on the Calendar this week, but are very important numbers for evaluating economic trends. We will soon find out if slowing GDP growth is real for the current quarter.
Have a great week!
After seeing a 2.73% Net Nominal Growth Rate during the 1st Half of 2014, we plan to take a deeper dive into the general categories of each major component with an assessment of current 2014 growth and their prospects for future growth. Since Personal Consumption Expenses (PCE) and Gross Private Domestic Investments (GPDI) account for 85% of GDP, then we only need to take a closer look at the 3.55% growth generated by these 2 major components. When combined, Government Expenditures and Net Exports negatively contributed 0.82% to GDP as expected, since Imports normally exceed Exports in good times and bad.
Let’s first take a look at the Change in Personal Consumption Expenditures (PCE) for the 1st Half of 2014.
Household Expenditures for Services (44%) and purchases of Non-Durable Goods (15%) account for almost 60% of Total GDP. Which categories contribute the most to the US Economy? The following is a summary:
- Non-Durable Goods This category includes 1) Food and Beverages purchased for off-premises consumption, 2) Clothing and Footwear, and 3) Gasoline and Other Energy Goods, the sum of which only amounted to 0.15% of the 0.46% contributed by items in the category. The sum total of the change contributes only 17% of GDP growth, and the remaining 67% is spread evenly among the “Other” items in this category.
- Household Expenses for Services This category includes: 1) Housing and Utilities, 2) Financial Services/Insurance, 3) Food Services/Accommodations, the sum of which amounted to 1.06% of the 1.46% contributed by items in the category. The sum total of the change contributes 53% of GDP growth, and the remaining 30% is spread evenly among the “Other” items in this category.
- Although Durable Goods gets a lot of press in the Media and the Auto Industry led the recovery, we can’t find any other high growth moves within the PCE Component of GDP that is worth discussion at this point. It should be noted that Durable Goods still contributed 0.44%, or 16%, to total GDP. It appears that the Auto Industry accounted for almost 2/3 of this growth as was the case during the 5-year recovery.
Let’s now take a look at the Change in Gross Private Domestic Investment (GPDI) for the 1st Half of 2014.
Fixed Non-Residential Investment accounts for 75% of GDPI’s contribution, while Fixed Residential Investment contributed only 16%. The remaining 10% is the Change in Private Inventories, which had significantly less impact during the 6-month period than in 2Q2014. The following sub-categories contribute the most to GDPI:
- Equipment and Intellectual Property Products account for 60% of Fixed Non-Residential Investment or an equivalent of 0.42% of the 1.04% contributed by GPDI to GDP.
- Structures account for 24% of Fixed Non-Residential Investment, or an equivalent of 0.18% of GPDI’s contribution to GDP.
- Residential Investment accounts for 16%, or 0.17% of the GPDI’s contribution to GDP.
So, where will the US Economy go from here? Manufacturing and Industrial Production Indexes have been fairly strong during the 1st half of the year. Recently, we have seen Manufacturing slow down its pace of growth. I expect Industrial Production to do same in the last half of 2014. This will negatively impact GDPI for the short-term.
Now, what about Consumption/PCE? We have seen PCE growth slowing over the last couple of months. However, the majority of its contribution is coming from Consumer Staples, household goods and services, including 1) Housing and Utilities, 2) Financial Services/Insurance, 3) Food Services/Accommodations, but, it also includes areas where households can delay some major purchase outlays. The encouraging news is that disposable income increased during the 1st 6-months of 2014, although July was flat. Consumers still have a healthy savings rate at 5.7%, but will they tap it to consume or just pay down their debts? Only time will tell, but there are encouraging, but volatile trends.
The University of Michigan’s Consumer Sentiment Index bounced back above 80 in August, and the NFIB’s Consumer Confidence Index has been steadily rising. Will consumer opinions about current economic conditions be enough for them to open up their wallets during the last half of the year? It will be interesting to watch, but I do believe PCE will bounce back for the short-term.
What is in your wallet?
@KeithEOuellette: This week’s key economic signals were more negative than positive (6 to 4) and our overall rating came in neutral so far in 3Q2014. The key is to align the economic news items with the weighted average to determine their impact on GDP. We have done just that in estimating GDP growth, utilizing our simple rating model.
For an explanation of the ratings, please refer to the post describing the Rating System.
FINAL SUMMARY OF 3Q2014 RATINGS
POSITIVE = 13
NEUTRAL = 13
NEGATIVE = 12
As of August 29, 2014
- July CPI inflation continues to be moderately rising. Food and Beverages lead the way at a 5% annual rate. Not good! http://t.co/SDSV2s7yEt
RATING = <2>
- The Big 4 Economic Indicators trend line appears to be moving down towards recessionary levels. Watch it closely! http://t.co/IwzselwTWC
RATING = 1
- July Coincident Indicators illustrate growth remains flat, but still reasonably high at 3% rate of change in index. http://t.co/Ac71CtQNiP
RATING = 2
- A deeper dive into Household Income during the recovery period discloses an average 3.1% drop in real income levels. http://t.co/IohS9WAb7o
RATING = <2>
- Median Household Income continues its crawl out of the pit since Jun’09, start of the recovery. Focus on Age Groups. http://t.co/YCMx8v01pR
NO RATING FOR OPINIONS
- US Economy gets a boost in job openings, but the Hires to Job Openings ratio is falling, indicating low job quality. http://t.co/7cjJt4zn9P
RATING = 1
- Should you look at 2Q2014 GDP growth of 4.2% as an effective increase of 6.3% from the <2.1%> in 1Q2014? Think again! http://t.co/8Nmy88nE6M
RATING = 1
- Real GDP per Capita rises 3.49% to $54,376, only 1.4% above ‘07 peak. Long-term regression trend shows it’s 10% down. http://t.co/Z9DEb1Q7E6
RATING = 2
- July ‘14 personal income up 0.2%. Nominal PCE down 0.1%. Real PCE down 0.2% but is going the wrong way for growth! http://t.co/k4VX1nF7WS
RATING = <2>
- July ‘14 Disposable Personal Income up 0.1%. Personal saving rate is 5.7%; consumers are holding down their spending. http://t.co/k4VX1nF7WS
RATING = <2>
- July’s LEI Index increased 0.9%, above expectations, which means GDP growth will continue over next 6-months. http://t.co/sQ892uUSxW
RATING = 2
- ECRI’s Weekly Leading Index continued its downward trend. Should we believe it after missing its Recession Call? http://t.co/sfK7c9Qv31
RATING = <2>
- Is NYSE Margin Debt a leading economic indicator for a stock market crash? Record S&P highs continue; hits 2000. http://t.co/cHAaECIrOp
RATING = 2
- Kansas City Fed reports that US Manufacturing growth is slowing down and came in under expectations in Aug’14. http://t.co/E4F8JYmsM7
RATING = <2>
Because of the BEA’s annual adjustment of prior periods in 1Q2014, I want to ignore the 1Q2014 contraction in GDP and inflation-adjusted GDP. There are just too many measures out there to discount Nominal GDP that confuses many of us who really want to know what is truly happening to our spend of US dollars. This post is for Mainstream America, so I plan to illustrate the Change in Nominal 2Q2014 GDP from 4Q2013 GDP in order to see where we have gone so far in 2014 without the “Hocus Pocus.”
The 6.2% change in 2Q2014 GDP is an anomaly since the 1Q2014 contraction was weather-related and the BEA’s annual adjustment impacted prior periods. I have been wondering if the weather had any impact on the BEA’s data sources for 1Q2014 GDP. In any event, after recovering nicely in 2Q2014, where do we stand in comparison to 4Q2013?
Let’s first take a look at the four major components of GDP, and then, in a future post this weekend, take a deeper dive into the major categories of each with an assessment of current 2014 growth and the prospects of future growth.
Personal Consumption Expenditures (PCE) contributed a whopping 92% of GDP growth. The collective sum of Gross Private Domestic Investment (GDPI), Government Expenditures and Net Exports contributed a net 8%. Of course, GDPI and Net Exports actually contributed 38% and (38%) respectively, but when combined, had no impact on GDP growth.
Can you see how analysts, economists and especially the Media can present the data in various ways? PCE’s 92% impact on GDP is a bit misleading. We could look at this another way: 1) PCE and Net Exports combine to contribute 54% to GDP, while 2) GDPI and Government Spending combined to contribute 46% to GDP. It is not significant as Headline material, is it? The Media blows everything out of proportion to sell news. Be careful in using only some of the data because there is “the rest of the story.”
The bottom line is this: PCE and GDPI continue to have a major impact on GDP growth, while Government Spending remains level in its spending and Net Exports is expanding its drain on GDP. From a Macro level standpoint, 2014 has been a good year so far based on recent historical levels. It is reflected in the Stock Market with the S&P 500 hitting 2000 in its record-setting pace. However, there is not a lot of shares changing hands and stock market activity is moving at a crawl, similar to the slowing pace of growth in our economy.
The change in Real GDP is another story or two depending on which GDP deflator is in use. The Feds keep changing the methods of accounting for inflation. In fact, the annual cost of living increase has negatively impacted Social Security recipients due to a change in its calculation. Although this helps the Government in reducing its Debt levels, it will also negatively impact Income and reduce PCE over the long-term. Is this a sacrifice we all have to pay in order to recover from this Debt Crisis?
In years to come, the droves of Retirees will be affected by this one change and will have less income to spend on goods and services. Will it have a positive impact of keeping the elderly in jobs longer improving the Labor Participation Rate? How will it impact the other social programs for the needy and those who cannot work? Congress has some tough decisions to make in the New Normal, a major structural change in the US Economy.
We will be preparing a Mind Map of the 6-Month Change in US GDP through YTD June before Labor Day. It will include some key economic indicators updated through July/Aug, but most of the August data will not be available. A Final Mind Map will be published after Sept 26th when the 3rd and Final Estimate of 2Q2014 is announced.