Written by Steven Hansen
April 2012 both Real Personal Consumption Expenditure (PCE) – the inflation adjusted spending of consumers again improved month-over-month, and Disposable Personal Income (DPI) rose for the second month in a row:
- Real PCE (inflation and seasonally adjusted) improved 0.3% month-over-month
- Real DPI rose (inflation and seasonally adjusted) improved 0.2% month-over-month
- the personal savings rate (expressed as a percentage of DPI) fell 0.1% to 3.4%
- The market looks at current values (not real) and was expecting a PCE rise of 0.2 to 0.3% (versus 0.3% actual), and a rise in DPI of 0.2% to 0.3% (versus 0.2% actual).
- this data is very noisy and as usual includes backward revision making real time analysis problematic.
Overall, this data is positive. On the bright side, consumers are still returning to the consumption trough. Still, the bad news is that the inflation adjusted data is saying consumers are continuing to spend faster than their income is increasing.
Econintersect believes year-over-year trends are very revealing in understanding economic dynamics. Again, 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 continues to grow year-over-year, but remain below the recession peak. Roughly, expenditures are growing 1.5% faster than income since 2007.
The graph below illustrates the relationship between income (DPI) and expenditures (PCE). The consumer since mid 2010 has continued to spend more of his income (and therefore saving less). Simply, the consumer is continuing to return to the trough.
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. 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 generally improving (although down this month).
The summary table follows, and Econintersect uses the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income after the taxes.
And please note that previous analysis of PCE and DPI has been somewhat negated by backward revision:
Estimates for personal income and DPI have been revised for October through March; estimates for PCE have been revised for January through March. Changes in personal income, current-dollar and chained (2005) dollar DPI, and current-dollar and chained (2005) dollar PCE for February and March — revised and as published in last month’s release — are shown below.
Estimates of wages and salaries were revised from October through March. The revision to fourth-quarter wages and salaries reflect the incorporation of the most recently available BLS tabulations of the fourth-quarter wages and salaries from the quarterly census of employment and wages. Revised estimates for January, February, and March reflect extrapolations from the revised fourth-quarter level of wages. In addition, revisions to February and March reflect revised BLS employment, hours, and earnings data for those months.
Although improving in March, in general the savings rate is in a downtrend. 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).