FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 29 June 2016

May 2016 Personal Consumption Growth At Expectations

Written by Steven Hansen

The headline data this month continues to show consumer expenditure growth. This continues to be postive for 2Q2016 GDP if one considers GDP as a good measure of the economy. The negative of the headlines are that income grew at half the rate of expenditures. One should also note that year-over-year analysis shows both income and expenditures are softening.

  • The market looks at current values (not real inflation adjusted) and was expecting (from Bloomberg):.
Consensus Range Consensus Actual
Personal Income - M/M change 0.2 % to 0.3 % 0.3 % +0.2 %
Consumer Spending - M/M change 0.2 % to 0.5 % 0.4 % +0.4 %
PCE Price Index -- M/M change 0.2 % to 0.2 % 0.2 % + 0.2 %
Core PCE price index - M/M change 0.1 % to 0.2 % 0.2 % + 0.2 %
  • The monthly fluctuations are confusing. Looking at the inflation adjusted 3 month trend rate of growth, disposable income growth rate trend decelerated while consumption's growth rate was unchanged.
  • Real Disposable Personal Income is up 3.2 % year-over-year (3.3 % last month), and real consumption expenditures is up 2.7 % year-over-year (3.0 % last month)
  • this data is very noisy and as usual includes moderate backward revision (detailed below) - this month the changes modified the year-over-year trends.
  • The third estimate of 1Q2016 GDP indicated the economy was expanding at 1.1 % (quarter-over-quarter compounded). Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time - consumer income and expenditure grow at the same rate.
  • The savings rate continues to be low historically, declined from 5.4 % last month to 5.3 % this month - which means the increase in consumption came at the expense of savings..

The inflation adjusted income and consumption are "chained", and headline GDP is inflation adjusted. This means the impact to GDP is best understood by looking at the chained numbers. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics.

Per capita inflation adjusted expenditure has exceeded the pre-recession peak.

Seasonally and Inflation Adjusted Expenditure Per Capita

Per capita inflation adjusted income is above pre-recession levels - and improved this month.

Seasonally and Inflation Adjusted Income Per Capita

Backward revisions this month:

Estimates have been revised for January through April. Changes in personal income, in currentdollar and chained (2009) dollar DPI, and in current-dollar and chained (2009) dollar PCE for March and for April -- revised and as published in last month's release -- are shown below.

The graph below illustrates the relationship between income (DPI) and expenditures (PCE) - showing clearly income and expenditures grow at nearly the same rate over time. In dollar terms, incomes are now growing faster than consumer expenditures - and this is positive for long term economic growth (as future spending is being banked).

Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)

The short term trends are mixed depending on the periods selected - but spending remains historically elevated.

Seasonally Adjusted Spending's Ratio to Income (a declining ratio means consumer is spending less of its Income)

PCE is the spending of consumers. In the USA, the consumer is the economy. Likewise, personal income is the money consumers earn to spend. Even though most analysts concentrate on personal expenditures because GDP is based on spending, increases in personal income allow consumers the option to spend more.

There is a general correlation of PCE to GDP (PCE is a component of GDP). PCE is not very noisy compared to GDP, but subject at times to significant backward revision (see caveats below).

Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)

Econintersect and GDP uses the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income after the taxes.

Seasonally & Inflation Adjusted Percent Change From the Previous Month - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

Yet year-over-year growth for income and expenditures is well above GDP growth.

Seasonally & Inflation Adjusted Year-over-Year Change - Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)

FRED Graph

The savings rate has been bouncing around - but the general trend is down. In an economy driven by consumers, a higher savings rate does not bode well for increased GDP. This is one reason GDP may not be a good single metric of economic activity. The question remains what is the optimal savings rate for the current demographics. It might be expected that as people near retirement, the savings rate rises and after people retire, savings rate falls. Econintersect is not aware of any study which documents this effect. The graph below is from BEA table 2.6. The savings rate is now 5.3 % - last month was 5.4 %.

Personal Savings as a Percentage of Disposable Personal Income

And one look at the different price changes seen by the BEA in this PCE release versus the BEA's GDP and BLS's Consumer Price Index (CPI). We should note that the inflation adjustment is for PCE and Personal Income is usually lower than the ones used for GDP and CPI.

Year-over-Year Change - PCE's Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green line)

Finally for recession watchers, here is the graph below, here are the elements used to mark a recession. (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

If a line falls below the 0 (black line) - that sector is contracting from the previous month. Personal income is the blue line. Note - the below graph uses multipliers to make movements more obvious (ignore the value of the scale, only consider whether the graph is above [good] or below [bad] the zero line).

Month-over-Month Growth Personal Income less transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)

Caveats on the Use of Personal Income and Consumption Expenditure Data

PCE is a fairly noisy index and subject at times to significant backward revision. This index cannot be relied upon in real time.

This personal income and personal consumption expenditure data by itself is not a good tool to warn of an upcoming recession. Econintersect has shown that PCE is a distraction for recession watchers, with moves over a few months having a 30% accuracy of indicating a recession start, and a 70% incidence of indicating a non-recessionary event. The graph below shows the lack of correlation. Note, however, that PCE does have prolonged declines over many months associated with recessions but these long declines are not very good in "predicting" a recession until it is already underway.

Readers are warned that this article is based on seasonally adjusted data. Monthly non-adjusted data is available with a delay of several months.

>>>>> Scroll down to view and make comments <<<<<<

Permanent link to most recent post on this topic

Click here for Historical Releases Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Economic Releases


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Comments on Feyerabend’s ‘Against Method’, Part III
Taking a Wrench to Healthcare
News Blog
Infographic Of The Day: Commodity Update, Is The Summer Slump Over
Early Headlines: Asia Stocks Mixed, Oil Mixed, Voting Fraud, Pres. Forecast Little Changed, CETA Not Dead, Generous Iraqis, Terrorists In Pakistan, Duterte Wants Divorce From US And More
October 24, 2016 Weather and Climate Report - La Nina / El Nino?
Most Read Articles Last Week Ending 22 October
Londoners Most Uneasy About Chatting To Strangers
Average Gasoline Prices for Week Ending 24 October 2016 Now Higher Than One Year Ago
Earnings And Economic Reports: Week Starting 24 October 2016
New Findings: Anxiety Is Linked To Death From Cancer In Men
Nearly 1 In 6 European Adults Is Considered Obese
Acupuncture Is Useless
September 2016 CFNAI Super Index Moving Average Declines
Consequences Of Rising Income Inequality
America's Most Competitive Renters: Why Many Are Choosing To Rent
Investing Blog
Slow Motion Torture
The Week Ahead: How Long For This Trading Range?
Opinion Blog
What Triggers Collapse?
The Beer Goggles Stock Market
Precious Metals Blog
Preparing For Post-Election Social Unrest
Live Markets
24Oct2016 Market Close: Wall Street Closes Higher, Quietly On Low Volume, Crude Back Up, US Dollar Trading At Resistance, Investors Remain Skeptical On Continuing Bullish Market
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved