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posted on 02 August 2016

June 2016 Personal Consumption Growth At Expectations, But Income Softens

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. And just to add confusion, this whole series underwent annual revision and pretty much changed what you thought you knew.

  • The market looks at current values (not real inflation adjusted) and was expecting (from Bloomberg):.
Consensus Range Consensus Actual
Personal Income - M/M change 0.3 % to 0.5 % 0.3 % +0.2 %
Consumer Spending - M/M change 0.2 % to 0.5 % 0.3 % +0.4 %
PCE Price Index -- M/M change 0.2 % to 0.3 % 0.2 % + 0.1 %
Core PCE price index - M/M change 0.1 % to 0.3 % 0.1 % + 0.1 %
  • 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 is accelerating.
  • Real Disposable Personal Income is up 2.2 % year-over-year (published 3.2 % last month - now revised to 2.3%), and real consumption expenditures is up 2.8 % year-over-year (published 2.7 % last month - now revised to 2.5%)
  • this data is very noisy and as usual includes moderate backward revision (effects of annual revision detailed below) - this month the changes modified the year-over-year trends.
  • The advance estimate of 2Q2016 GDP indicated the economy was expanding at 1.2 % (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, and declined to 5.3 % this month.

z pce_table.png

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:

The estimates released today reflect the results of the annual update of the national income and product accounts (NIPAs) in conjunction with preliminary estimates for June 2016. The update covers the most recent 3 years and the first 5 months of 2016. For more information, see "Information on the 2016 Annual Update" on BEA's website. Additionally, the August Survey of Current Business will contain an article that describes the results in detail.

Revisions to the personal income and outlays estimates reflect the results of the recent annual update of the national income and product accounts (NIPAs). These updates, usually made each July, incorporate newly available and more comprehensive source data, as well as improved estimation methodologies. This year's update covers the period January 2013 through May 2016. Revisions to annual estimates of personal income and outlays for 2013 through 2015 are shown in Table 12. Revised and previously published monthly estimates of personal income, DPI, PCE, personal saving as a percentage of DPI, real DPI, and real PCE are shown in Table 13. Revised and previously published annual and quarterly estimates are shown in Table 14.

Personal income was revised upward $5.3 billion, or less than 0.1 percent, for 2013, $115.5 billion, or 0.8 percent, for 2014, and $107.8 billion, or 0.7 percent, for 2015.

  • For 2013, revisions to personal income and its components were small.
  • For 2014, upward revisions to personal dividend income, government social benefits to persons, and supplements to wages and salaries were partly offset by downward revisions to farm proprietors' income and rental income of persons.
  • For 2015, upward revisions to personal dividend income, wages and salaries, personal current transfer receipts, nonfarm proprietors' income, and supplements to wages and salaries were partly offset by downward revisions to farm proprietors' income and personal interest income.

DPI was revised upward $0.2 billion, or less than 0.1 percent, for 2013, $108.8 billion, or 0.8 percent, for 2014, and $116.6 billion, or 0.9 percent, for 2015. The percent change from the preceding year in real DPI was the same as previously published in 2013, decreasing 1.4 percent. It was revised upward from an increase of 2.7 percent to an increase of 3.5 percent in 2014, and was the same as previously published in 2015, increasing 3.5 percent. Personal outlays was revised downward $30.0 billion, or 0.3 percent, for 2013. It was revised upward $3.0 billion, or less than 0.1 percent, for 2014, and $18.7 billion, or 0.1 percent, for 2015. Revisions to personal outlays primarily reflected revisions to PCE. The personal saving rate was revised upward 0.2 percentage point from 4.8 percent to 5.0 percent in 2013, 0.8 percentage point from 4.8 percent to 5.6 percent in 2014, and 0.7 percentage point from 5.1 percent to 5.8 percent in 2015.

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 revised up to 5.5 %.

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.

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