Written by Steven Hansen
January 2012 Real Personal Consumption Expenditure (PCE) – the inflation adjusted spending of consumers was unchanged month-over-month, but Disposable Personal Income (DPI) declined slightly:
- Real PCE (inflation and seasonally adjusted) unchanged 0.0% month-over-month
- Real DPI rose (inflation and seasonally adjusted) down 0.1% month-over-month
- the personal savings rate (expressed as a percentage of DPI) fell 0.1% to 4.6%
- The market looks at current values (not real) expecting a PCE rise of 0.2% (versus 0.2% actual), and a rise in DPI of 0.4% (versus 0.3% actual).
Overall, this data seems mixed. On the bright side, the downward year-over-year trend in Real PCE was broken this month – it means the improvements had been growing at a “less good” rate but have now stabilized, at least for this month. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics. There was a broad, and in places significant, revision this month in the data for the last six months, which is explained below (see caveats below).
Keeping it real, per capita inflation adjusted income was $32,682 in January 2007 – and is literally unchanged at $32,675 in this January 2012 data. There has been a 3% inflation adjusted increase in expenditures over this same period.
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. This index has shown negative growth several times since the end of the 2007-09 recession. The overall trend since August 2009 is slightly negative. PCE is a fairly noisy index and subject at times to significant backward revision (see caveats below). Econintersect views this data using a three month moving average which is now becoming “less good”.
The summary table follows, and Econintersect uses the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income left after the tax man.
From the Bureau of Economic Analysis (BEA) press release on DPI movements:
The January change in disposable personal income was affected by several special factors. Personal income in January was boosted by pay raises for federal military personnel and cost-of-living adjustments to government social security benefits. Personal income in January was reduced by the expiration of refundable tax credits within “other” government social benefits to persons, by annual adjustments to personal contributions for government social insurance (a subtraction in the calculation of personal income), and by lump-sum social security benefit payments that had boosted December personal income. Personal current taxes, which are a subtraction in the calculation of DPI, were boosted in January by federal net nonwithheld income taxes. Excluding these special factors, which are discussed more fully below, DPI increased $19.4 billion, or 0.2 percent, in January, following an increase of $41.3 billion, or 0.4 percent, in December.
And please note that previous analysis of PCE and DPI has been somewhat negated by backward revision:
Estimates of personal income and DPI have been revised for July through December; estimates for PCE have been revised for October through December. Changes in personal income, current dollar and chained (2005) dollar DPI, and current-dollar and chained (2005) dollar PCE for November and December — revised and as published in last month’s release — are shown below.
Estimates of wages and salaries were revised from July through December. The revision to third-quarter wages and salaries reflected the incorporation of the most recently available BLS tabulations of the third-quarter wages and salaries from the quarterly census of employment and wages. Revised estimates for October, November, and December reflect extrapolations from the revised third-quarter level of wages. In addition, revisions to November and December reflect revised BLS employment, hours, and earnings data.
Personal savings rate jumped significantly in December, but now has declined again in January 2012. 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.
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 not available. Econintersect has concerns that seasonally adjusted data is not accurate in the New Normal.
The above graph plots year-over-year data instead of month-over-month which is likely a more accurate approach to understanding PCE. Again, this is seasonally adjusted data – and there should NOT be continuing occurrence of year-over-year single month blips every few months (red circles on above graph).