How to Calculate Q2 Personal Consumption Expenditure (PCE) Growth

In the schedule for the coming week, I mentioned that the consensus is for personal consumption expenditures (PCE) to be unchanged in April compared to March. Does this mean PCE might not grow in Q2?

First, we don't know the actual number for April yet - and we don't know about May and June - but even if PCE were flat for all three months compared to March, quarterly PCE would grow 1.3% in Q2. This is because quarterly PCE is calculated as an average of the current quarter divided by the average for the previous quarter (seasonally adjusted and annualized).

The following table shows how this works. For Q4 2012, PCE averaged $9,663.8 SAAR (Seasonally Adjusted Annual Rate, billions, 2005 dollars). For Q1 2013, PCE averaged $9,740.0.

 If we divided $9,740.0 by $9,663.8 we get 1.007885. Then annualize (take to the fourth power) and subtract 1, and the growth rate is 3.2% (just what the BEA reported for PCE growth in Q1).

If we do the same calculation for Q2, even if PCE is flat for all three months in Q2 (April, May and June), PCE will grow by 1.3% in Q2.

Q2 Personal Consumption Expenditure (PCE) Growth
Quarter	Month	Real PCE, SAAR 2005 dollars (Billions)	Qtr Average	Qtr Growth Rate
	Oct-12	$9,629.5
Q4	Nov-12	$9,673.0	$9,663.8
	Dec-12	$9,689.0
	Jan-13	$9,708.7
Q1	Feb-13	$9,740.3	$9,740.0	3.2%
	Mar-13	$9,771.1
	Apr-13	$9,771.11
Q2	May-13		$9,771.1	1.3%
	Jun-13
1Consensus forecast for April 2013

If instead we just compare April to January, PCE would be growing at a 2.6% annual rate in Q2.  This is one of the reasons several analysts have recently upgraded their forecasts for Q2 GDP.  It appears likely that PCE growth will be above 2% in Q2. Of course government spending - especially Federal government spending - will probably remain a drag on GDP in Q2 (there has been record shrinkage of the public sector over the last several years).

The following graph shows real Personal Consumption Expenditures (PCE) through March (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.    

Since PCE grew at just under a 4% annualized rate in February and March (and quarterly PCE is an average for the quarter), if PCE is flat in April, May and June, PCE already has some growth built in for Q2 compared to Q1.

Schedule for Week of May 26th

The key reports this week are the second estimate of Q1 GDP on Thursday, the April Personal Income and Outlays report on Friday, and the Case-Shiller house prices for March on Tuesday.

The FDIC will probably release the Q1 Quarterly Banking Profile this week (no scheduled date).

----- Monday, May 27th -----
All US markets will be closed in observance of Memorial Day.

----- Tuesday, May 28th -----
9:00 AM: S&P/Case-Shiller House Price Index for March. Although this is the March report, it is really a 3 month average of January, February and March.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indexes through February 2012 (the Composite 20 was started in January 2000).

The consensus is for a 10.2% year-over-year increase in the Composite 20 index (NSA) for December. The Zillow forecast is for the Composite 20 to increase 9.8% year-over-year, and for prices to increase 0.9% month-to-month seasonally adjusted.

10:00 AM: Conference Board's consumer confidence index for May. The consensus is for the index to increase to 71.5 from 68.1.

10:00 AM: Richmond Fed Survey of Manufacturing Activity for May. The consensus is for a a reading of minus 3 for this survey, up from minus 6 in April (Below zero is contraction).

10:30 AM: Dallas Fed Manufacturing Survey for May. This is the last of regional surveys for May.  The consensus is a reading of minus 8, up from minus 15 in April (below zero is expansion).

----- Wednesday, May 29th -----
7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

----- Thursday, May 30th -----
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims at 340 thousand, unchanged from last week.

8:30 AM: Q1 GDP (second estimate). This is the second estimate of Q1 GDP from the BEA. The consensus is that real GDP increased 2.5% annualized in Q1, unrevised from the advance report.

10:00 AM ET: Pending Home Sales Index for April. The consensus is for a 1.4% increase in the index.

----- Friday, May 31st -----
8:30 AM ET: Personal Income and Outlays for April. The consensus is for a 0.1% increase in personal income in April, and for no change in personal spending. And for the Core PCE price index to increase 0.1%.

9:45 AM: Chicago Purchasing Managers Index for May. The consensus is for an increase to 50.0, up from 49.0 in April.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (final for May). The consensus is for a reading of 83.7.

Unofficial Problem Bank list declines to 767 Institutions

This is an unofficial list of Problem Banks compiled only from public sources.

Here is the unofficial problem bank list for May 24, 2013.

Changes and comments from surferdude808:

This week the Unofficial Problem Bank List declined to 767 institutions with assets of $283.7 billion after four removals and one addition. A year ago, the list held 931 institutions with assets of $358.0 billion. The removals were all from unassisted mergers including Centennial Bank, Fountain Valley, CA ($546 million); The Washington Savings Bank, FSB, Bowie, MD ($357 million); First National Bank of Baldwin County, Foley, AL ($187 million); and Kinderhook State Bank, Kinderhook, IL ($18 million). The addition was The Talbot Bank of Easton, Easton, MD ($713 million Ticker: SHBI).

The legal hearing in Nevada on Capitol Bancorp's restraining order to prevent the closing of 1st Commerce Bank, North Las Vegas ($24 million) was sealed by the presiding judge. So there is nothing new to report on that matter. Next week, we anticipate the FDIC will release its enforcement action activity through April 2013 and, perhaps, industry results for the first quarter of 2013, which will include updated figures for the Official Problem Bank List. The institution count difference between the official and the unofficial list was 157 at the last quarterly release and the difference will likely reduce to around 150.

On the unofficial list:

Because the FDIC does not publish the official list, a proxy or unofficial list can be developed by reviewing press releases and published formal enforcement actions issued by the three federal banking regulators, reviewing SEC filings, or through media reports and company announcements describing that the bank is under a formal enforcement action. For the most part, the official problem bank list is comprised of banks with a safety & soundness CAMELS composite rating of 4 or 5 (the banking regulators use the FFIEC rating system known as CAMELS, which stands for the components that receive a rating including Capital adequacy, Asset quality, Management quality, Earnings strength, Liquidity strength, and Sensitivity to market risk. A composite rating is assigned from the components, but it does not result from a simple average of the components. The composite and component rating scale is from 1 to 5, with 1 being the strongest). Customarily, a banking regulator will only issue a safety & soundness formal enforcement when a bank has a composite CAMELS rating of 4 or 5, which reflects an unsafe & unsound financial condition that if not corrected could result in failure. There is high positive correlation between banks with a safety & soundness composite rating of 4 or worse and those listed on the official list. For example, many safety & soundness enforcement actions state in their preamble that an unsafe & sound condition exists, which is the reason for action issuance.

Since 1991, the banking regulators have statutorily been required to publish formal enforcement actions. For many reasons, the banking regulators have a general discomfort publishing any information on open banks especially formal enforcement actions, so not much energy is expended on their part ensuring the completeness of information in the public domain or making its retrieval simple. Given the difficulty for easy retrieval of all banks operating under a safety & soundness formal enforcement action, the unofficial list fills this void as a matter of public interest.

All of the banks on the unofficial list have received a safety & soundness formal enforcement action by a federal banking regulator or there is other information in the public domain such as an SEC filing, media release, or company statement that describe the bank being issued such an action. No confidential or non-public information supports any bank listed and a hypertext link to the public information is provided in the spreadsheet listing. The publishers make every effort to ensure the accuracy of the unofficial list and welcome all feedback and any credible information to support removal of any bank listed erroneously.

Labor Force Participation Rate Sensitivity

This morning I posted some comments from Michelle Meyer at Merrill Lynch on the likely path of the labor force participation rate. She wrote:

[W]e forecast the LFPR will slip slightly this year, but with a stronger recovery under way next year, the LFPR should start to level off some and potentially increase beginning in 2015.

The following table is an estimate of the unemployment rate in December 2013 and December 2014 assuming the LFPR stays close to the current level of 63.3% (I looked at 63.0%, 63.3% and 63.6%).  The current unemployment rate is 7.5%.

I also looked at three rates of payroll job growth, 167 thousand per month, 185 thousand per month and 200 thousand per month. I think it is possible that employment growth will pick up later this year, and if that happens, the unemployment rate will fall further in 2014.

Caveat: The payroll estimate is for the establishment survey, and the unemployment rate and participation rate are from the household survey - and this is just a rough estimate.

Looking at the table, the participation rate is very important for estimating the unemployment rate.  If the participation rate stays steady, the unemployment rate will probably be close to 7.1% in December at the current rate of payroll growth, and around 6.6% in December 2014.  If the participation rate dips further, the unemployment rate could fall below 7% this year and low 6%s at the end of 2014.

December 2013 Unemployment Rate
	Jobs added per month (000s)
Participation Rate	167	183	200
63.0%	6.8%	6.7%	6.6%
63.3%	7.2%	7.1%	7.1%
63.6%	7.6%	7.5%	7.4%
December 2014 Unemployment Rate
	Jobs added per month (000s)
Participation Rate	167	183	200
63.0%	6.4%	6.2%	6.0%
63.3%	6.8%	6.6%	6.4%
63.6%	7.2%	7.0%	6.7%