we'll look at the 3rd estimate of the 3rd quarter GDP first, which was released by the BEA on Friday, and then we'll look at current data that will influence the 4th quarter GDP report, which will be released January 30th…according to the 3rd estimate, the seasonally adjusted output of goods and services produced in our country grew at an annual rate of 4.1% between the 2nd quarter and 3rd quarter of this year and stood at an annualized $16,912.9 billion in current dollars at the end of the quarter; this growth rate was well above forecasts, as were the original estimate of a 2.8% growth rate and the second estimate of growth at a 3.6% annual rate, and the strongest economic growth since the 4.9% rate in the last quarter of 2011...understand that when it's said that the economy grew at a seasonally adjusted 4.1% annual rate in the 3rd quarter, the BEA is saying that if the economic expansion that occurred during the 3 month period between July and September were to continue at the same rate for an entire year, the output of goods and services would be 4.1% larger than a year ago...the actual growth rate over each of the last 4 quarters was 0.1% for the 4th quarter of 2012, 1.1% for the 1st quarter, 2.5% for the second quarter & 4.1% for the third, which nets out to an actual growth of 1.9% over the last year...to understand each quarterly GDP repot, we have to realize all growth rates are reported in such annualized figures, and all such annualized percentage changes are adjusted for inflation using chained 2009 dollars...without that inflation adjustment, nominal current dollar GDP grew at a 6.2% annual rate in the 3rd quarter...
Additions to Spending for Health Care, Gasoline, Investment in Software Boost 3rd Quarter GDP
in contrast to the 2nd estimate, where we saw that most of the revision in growth was due to a buildup of inventories, this revision was mostly due to greater than previously estimated personal consumption expenditures (PCE)...originally seen to have grown at an anemic 1.4% rate in the 3rd quarter, PCE is now seen to have grown by a seasonally and inflation adjusted $52.3 billion, or at a 2.0% annual rate, and thus contributed 1.36% to the 3rd quarter's growth rate of 4.13%; the largest revision was in expenditures for health care, which, based on newly available data from the Census quarterly services survey, grew at an inflation adjusted $12.0 billion in the 3rd quarter, rather than the originally reported $4.0 billion gain...there was also a $4.0 upward revision to spending on gasoline & other fuels based on revised EIA data for September, while the there was a $3.1 billion extra added to outlays for real recreation services, which was mostly offset by a similar decline in outlays for transportation services...so on net, services expenditures are now seen to have grown at a $12.1 billion rate and contributed .32% to GDP...meanwhile, the quarterly increase in spending for durable goods was little changed at a $25.4 billion annual rate, and contributed 0.58% to GDP, while spending for non-durable goods was up at a $16.9 billion rate and contributed 0.46% to third quarter growth...
in addition, gross private domestic investment was seen to have grown at a 4.8% rate, or by an inflation and seasonally adjusted $102.3 billion, slightly more than the $99.7 billion of the 2nd estimate, and contributed 2.49% to the 3rd quarter growth figure...most of that, as we noted in reviewing the 2nd estimate, was due to a $59.1 billion addition to private inventories, which was barely changed in this estimate as the change added 1.67% to GDP...most of the change to investment in this revision resulted from a upward revision to nonresidential fixed investment, which grew at a $35.6 billion rate, not the $32.3 billion rate previously reported, and which contributed 0.42% to GDP...most of that, in turn, was a revision in the increase in the growth of intellectual property products, or more specifically software, which grew by $6.1 billion in the quarter, not by $1.4 billion as previously reported...so overall investment in intellectual property products increased at a 5.8% rate and contributed .22% to GDP, while growth in investment in nonresidential structures increased 13.4% and contributed .58% to GDP, while investment in equipment increased just 0.2% and added just 0.02% to the final figure...in addition, real residential fixed investment was revised lower due to revised Census new home sales and price data for July through September and showed an increase of $12.1 billion, or at a 10.3% rate, rather than the $15.1 billion or 13.0% rate of increase previously reported; as a result, resident investment added .31% to GDP, not the .38% we reported last month...
meanwhile, there were only modest changes in the amounts or contribution from exports and imports in this revision...real exports of goods and services are now seen as growing at a 3.9% rate in the third quarter to an inflation and seasonally adjusted $2,017.6 billion, compared to the increase at a 3.7% rate previously reported; thus exports added .52% to the GDP figure, not the .50% reported in the 2nd estimate...on the other hand, real imports of goods and services increased 2.4% to an inflation and seasonally adjusted $2,437.3 billion in the 3rd quarter, which was reported last month as a 2.7% increase; thus imports only subtracted .39% from the GDP growth rate, not the .43% we reported earlier...
similarly, there were only minor revisions in the amounts and contributions from government consumption expenditures and gross investment with this release...3rd quarter federal government consumption and investment decreased by an inflation and seasonally adjusted annual rate of $4.3 billion to $1,163.9 billion, which was at a 1.5% rate compared to the second quarter; that was originally reported as a 1.4% decrease in federal outlays...defense spending decreased at a 0.5% rate over the quarter and knocked 0.2% off GDP, while nondefense spending decreased 3.1% and reduced GDP by 0.9%...but real state and local government consumption expenditures and gross investment increased at a 1.7% rate to $1,743.2 billion and added .19% to GDP, turning the contribution from the government sector positive...
the zero hedge bar graph below shows by color coding how each of the major components of GDP contributed to each quarterly result since the second quarter of 2011, with the black line tracking the quarterly GDP growth rate across the chart; in addition, the pink shaded box on the right shows the clear and sizable differences between the first, second and third estimates for the 3rd quarter result, which at 45% they report is the largest cumulative revision on record….noting that additions to quarterly GDP are above the red dashed “0.00%” line and subtractions from GDP are below, 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…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 contraction 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 for each quarter, which was so small in the 3rd quarter as to not be visible…clearly, it’s been consumers in blue and fixed investment in red that have provided most of the growth over the last two and a half years..
November Consumer Prices Unchanged as Rent Increases are Offset by Lower Energy Costs
next we're going to take a look at consumer prices for November, because we're going to want to use that data to adjust the retail sales report we covered last week, which didnt account for changes in price, for those changes...we do that because inflation and seasonally adjusted sales for the month will give us an insight into how those sales will contribute to personal consumption expenditures in 4th quarter GDP figures, which as we've just seen, are the largest component of GDP overall...
the Consumer Price Index for November from the Bureau of Labor Statistics again showed no increase in prices overall due to lower energy costs...the seasonally adjusted energy price index, which accounts for 9.6% of the CPI, fell 1.0% for the month, offsetting modest price increases in rent and other services, leaving the seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) unchanged for the month....the unadjusted index, based on 1982-84 prices = 100, was at 233.069, down fractionally from 233.546 in October and up just 1.2% from the 230.221 reading of a year earlier...driving the decline in energy prices were gasoline prices that were 1.6% lower than in October, and now 5.8% lower than a year ago...fuel oil, down 0.6% in October, rose 0.4% in November, and the composite for other fuel commodities, including kerosene, propane and firewood, also rose 0.3%..but energy services were down 0.2% in November as prices for natural gas fell 1.8%, which was only partially offset by a 0.3% increase in the cost of electricity...after October's energy price index decline of 1.7%, November's data left energy prices 2.4% lower than they were a year earlier...
increases in food prices were also modest, as the food index rose 0.1% in November, the same increase as in October; however, all of that was due to a 0.3% increase in prices for food away from home, as both fast food outlets and full service restaurants saw prices rise 0.2% while food at work sites and schools rose 0.6%... meanwhile, seasonally adjusted prices for food at home were statistically unchanged, as the unadjusted food price index fell from 234.418 to 233.639 in November, which was only 0.6% higher than the 232.295 index reading of a year earlier...of the major food groups, only dairy products, which increased 0.4%, saw prices higher in November, as prices for milk rose 2.0% and cheese prices were 0.9% higher...prices for cereals and bakery products were statistically unchanged, as a 2.6% increase in bread prices was offset by 1.5% lower prices for biscuits, rolls, muffins, 0.9% lower prices for rice, pasta and cornmeal, and 0.4% lower prices for flour and mixes...seasonally adjusted prices in the meat group were down 0.2% in November, as chicken prices fell 1.5%, pork prices fells 0.8%, seafood prices fell 0.3%, while beef prices rose 0.5% and egg prices were 1.1% higher....fruit and vegetable prices were also lower, by 0.7%, as fresh vegetable prices were 2.0% lower on 4.0% lower lettuce prices and potatoes that were 1.5% cheaper, and fresh fruits prices slipped 0.1% as apples were up 0.7% while oranges were 1.2% less, while processed fruits and vegetables rose 0.5%...beverage prices were 0.2% lower as frozen juices fell 0.5%, roast coffee fell 0.6% while carbonated drinks were unchanged...in addition, prices for the catch all grouping of 'other foods at home' were up 0.5% as the spices, seasonings, condiments, sauces index rose 2.2%, margarine prices were up 1.3%, while snacks fell 1.7%, sugar & sweets fell 0.5%, and fats and oils also fell 0.5%...
excluding price changes for food and energy, the so-called core CPI was up 0.2%, the most since July core prices rose by the same percentage...the unadjusted core index was little changed, however, as it rose from 235.162 in October to 235.243 in November, which was 1.7% above the year earlier reading of 231.263 ...the shelter index, which accounts for 31.8% of the CPI by itself, drove the increase as it was up 0.3%, with rents up 0.2%, homeowner's equivalent rent up 0.3% and prices for lodging away from home up 2.9%...in contrast, the apparel price index fell 0.4% in November, as prices for men's clothing fell 1.5%, women's wear prices fell 0.2%, footware fell 0.4%, & toddlers' apparel rose 1.9%... in addition, the index for medical care was unchanged in November, with both medical care commodities and medical care services also unchanged, as a 0.2% increase in prescription drug prices was offset by a 1.1% decrease in medical equipment and supplies prices, while a 0.2% increase in physicians services was offset by a decrease of 0.4% in hospital charges...prices for transportation commodities less energy were unchanged as used car prices rose 0.1% and new car prices were down 0.1%, while the transportation services index rose 0.3% due mostly to another 2.6% jump in airfares...meanwhile, the recreation price index was up 0.2% as recreation services were up 0.3% as cable and satellite TV and veterinary services both rose 0.5%, while recreation commodity prices were unchanged as sporting good prices rose 0.5% and TV prices fell 0.5%...finally, the last major price index, which combines education and communication, also saw 0.2% higher prices. as education and communication commodities rose 0.1% as a 2.3% increase in telephone hardware prices more than offset a 1.6% decrease in computer software and accessories prices, while education and communication services rose 0.2% on a 0.6% increase in tuitions....
our FRED graph below shows the relative price change in each of these major components of the CPI-U since January 2000, with all the indexes reset to 100 as of that date to allow for a comparison between indexes with different origination dates…in blue, we have the track of the change in the price index for food and beverages, which tracks pretty close to the track of the CPI-U, which is shown in black; in red, we have the change in the price index for housing, which includes rent and equivalents, utilities, repairs and other homeowners costs like insurance and which at 41% of the CPI also tracks close to the CPI… in violet, we have the price index for apparel, which has been the only index to show a net price decline over the decade…the transportation index, in brown, shows the impact of volatile gas prices on the cost of transportation, while the price index for medical care in orange has obviously risen the most over the entire period…in addition, education and communication prices are tracked in dark green, and the track of the recreation price index is shown in light green.. 
We Find Real Retail Sales Rose ~.91% in November
now that we have the November prices changes for all items sold at retail, we can now go back to last week's retail sales report and compute real retail sales, which adjusts what was sold at retail for inflation; we do this by adding an appropriate percentage to nominal sales when the prices declines (because that means more of the items were produced and purchased) and subtracting from real sales when the price increases.…we then compare that result to the previous month's sales to determine the actual or real change in unit sales for the month...understand that the sales numbers we generate no more represent actual current dollar sales for the month than do seasonally adjusted numbers; both are generated from the actual data as a means of comparing growth from one month to the other...
so; first, we adjust the seasonally adjusted $76,168 million in November motor vehicle sales with the weighted price changes for new cars (down 0.1%) and used cars (up 0.1%) and find that would add $26 million to real vehicle sales; then we adjust the $9,099 million in sales of auto parts, accessories. & tires with the 0.1% decrease in the vehicle parts and equipment price index and add another $9 million to real retail sales from that adjustment...next, we'll adjust the $8,895 million in furniture sales with the 0.5% decline in prices for furnishings and supplies, which will add another $44 million to real sales....then, adjusting $8,989 million in electronics & appliance sales with appropriately weighted indices for video and audio products. which was unchanged, appliance prices, which were down 0.5%, and information tech commodities, which were off 0.3%, gives us a addition to real sales of $24 million; in addition, adjusting $26,391 million in building material & garden supplies sales with the price index for tools, hardware, outdoor equipment, which was off 0.5%, adds another $131 million to our real sales number; but while there were $54,555 million in food & beverage sales, the food at home price index was unchanged, so there will be no change accruing to real sales from this business group; similarly, there were $24,305 million in drug store sales but the medical care commodities index was also unchanged so real drug store sales will also be unchanged....adjusting $44,752 million in gas stations sales with the 1.6% decline in the price of gasoline will add $716 million to our computed real sales figure; while this may seem excessive, we have to remember that the $44,752 million gas station sales figure represents November sales that were down 1.1% in nominal dollars, and that what we're doing is restoring that to represent the increase in real sales of gallons of gasoline in November as if they were sold at October's price, which is what we must do if we want a comparable unit sales change figure...next, adjusting $21,218 million in clothing stores sales for the 0.4% price decline in the apparel price index will add another $85 million, while they'll be no real sales adjustment for the $7,676 million in sales at sporting goods, hobby, book & music stores when adjusted with the unchanged recreational commodity index....adjusting $60,292 million in sales at general merchandise stores with the index for retail commodities less food and energy prices, which was off 0.1%, adds another $60 million to real sales, while adjusting the $10,094 of miscellaneous store sales with the same index adds another $10 million....based on the top internet sales items, we'll adjust the $40,053 million in sales by nonstore retailers with a weighted combination of software and book prices, which were down 0.5%, consumer electronics, which saw no price change, and apparel, for which prices dropped 0..4% will add $86 million to real sales, while adjusting $43,074 million in food services & drinking places with the 0.3% price rise in food away from home subtracts $129 million from real retail sales...adding all these adjustments together, we find that the total dollar adjustment to convert November sales to their October price equivalents would be $1,002 million, which we then add to seasonally adjusted November sales in order to compute the month over month change in real retail sales, which we find is an increase of .91%, instead of the .68% increase in retail sales as reported by the census without adjusting for lower prices…in PCE or GDP terms, that is growth in personal consumption of goods at a 11.5% annual rate…note that even without the increase in unit sales of gasoline, all other real retail sales would have been up .86%, which is still growth in real consumer retail spending at a double digit annual rate…
Cold November Helps Push Industrial Production to an All Time High
finally, we'll take a look at the Fed's current G-17 release, which covers Industrial Production and Capacity Utilization for November, and which indicated that seasonally adjusted industrial production increased 1.1% in November, while October's report was revised to show a gain of 0.1% instead of the 0.1% pullback reported last month...however, like many of the previous times we've seen a large upside surprise to this monthly number, the weather again was a major factor, as colder than average temperatures for most of the country east of the Rockies boosted demand for heating above seasonal norms...as a result, the utility index, which accounts for almost 10% of total production, rose by 3.9% to 103.9, on an index system used in this release wherein 2007 was set equal to 100 for each index...but the important manufacturing index, accounting for more than 3/4ths of production, was still up 0.6% to 97.2, its best increase since August...and the mining index, which includes oil & gas production, more than reversed its 1.5% decline in October by growing 1.7% for the month to a new record at 122.5...combined, these index increases led the industrial production index to post its all time high reading at 101.3, 3.2% higher than a year earlier...
while the changes in those three industry groups (manufacturing, mining and utilities) generate the headlines for media covering this report, it's details on industrial production by market group where we learn what's really going on...final products and nonindustrial supplies, for instance, accounts for 53.46% of all industrial output and grew at a 0.9% rate in November; of that, more than half is production of consumer goods, which grew at a 1.5% rate after edging down 0.1% in October; production of consumer durables rose 2.2% on a 3.3% month over month increase in automotive products production and a 2.6% increase in output of home electronics, while production of appliances, furniture, carpeting and other durables all also rose at a healthy 1.0% monthly rate...production of consumer durable goods is now up 9.1% on a year over year basis...production of non-durable consumer goods also rose by a respectable 1.3% in November, led by a 3.3% increase in energy production, while output of chemical products increased 1.4% and paper products grew 0.9%...the only laggards were food production, which grew 0.2%, and clothing production, which was unchanged in November...production of consumer non-durable goods has now turned positive on a year over year basis with a 0.9% growth rate..
meanwhile, production of business equipment slipped 0.5% in November after a small 0.2% increase in October; production of transit equipment rose 1.0% after a 0.1% decrease in October and was now up 1.6% since last November, while production of information processing equipment fell 1.8% and was now up just 1.5% for the year, and output of industrial and other equipment fell 0.6%, and was now up 2.8% since November of 2012 ...in addition, production of defense and aerospace equipment also declined 0.8% in November and was just up 1.4% for the year....among nonindustrial supplies, construction supplies was up 0.6% in November and 4.9% for the year, while output of business supplies rose 1.0% for the month. which brought output 3.1% above that of a year earlier...
the production of materials to be processed further in the industrial sector, which accounts for 46.54% of the industrial production index, rose 1.4% in November, which put it 3.8% higher than last November's output..every sector saw production gains, with inputs into durable goods rising 0.9% on a 2.1% increase in the output of consumer durable parts and a 1.2% increase in production of equipment parts...materials for use in non-durable goods rose 0.2%, with a 2.4% increase in textiles production and a 0.4% increase in production of chemicals more that offsetting the 0.5% decrease in output of paper products inputs...and production of inputs into the energy sector rose by 2.7% and were up 5.7% for the 12 months ending November...
capacity utilization, expressed as the percentage of the plant and equipment that was in use during the month, is also given for each industry; capacity utilization for total industry rose from 78.2% in October to 79.0% in November; that compares to an operating rate of 77.9% a year earlier...77.5% of our manufacturing plant and equipment was in use during November, up from 77.1% in October.…manufacturers of durable goods were operating at 77.3% of capacity, up from 76.9% in October, with motor vehicles manufacturers seeing a jump in plant usage from 75.9% to 78.4%, wood products industries plant usage up from 71.1% to 73.4% and only the machinery, computer and electronics and aerospace and similar transportation equipment manufactures showing a utilization decline...manufactures of non-durable goods raised their capacity utilization from 77.2% to 77.6% as every non-durable group except food producers saw modest increases in plant utilization....meanwhile, the operating rate for mining equipment rose from 88.6% in October to 89.7% in November, and as we'd expect with the jump in utility output, capacity utilization for those industries rose by 3.0% from 78.0% to 81.0%...over the past year, manufactures have also added 1.6% additional plant and equipment to their capacity, while mining companies, primarily oil and gas drillers, increased their capacity by 4.4% and utilities increased their potential output by 0.9%...
our FRED graph for this report, included below, shows the industrial production index for all industry in black, the manufacturing production index in blue, the utility production index in green, and the mining production index in red from the beginning of the index year of 2007, at which time they were all benchmarked to equal 100.0; we can see the overall industrial production index has finally hit a new high at 101.3, and the mining index continues to hit new highs, as domestic oil & gas operations expand…meanwhile, the utility index shows the volatility introduced by aberrant weather, and manufacturing has still not reached prerecession levels …also shown is the track of capacity utilization for total industry since 2007 in pink; note that it’s a percentage, rather than an index number like the other metrics we’re tracking on the same 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…)