Written by Steven Hansen
May 2012 both Real Personal Consumption Expenditure (PCE) – the inflation adjusted spending of consumers is weakening – and backward revision again destroyed past gains. Disposable Personal Income (DPI) rose for the third month in a row:
- the personal savings rate (expressed as a percentage of DPI) rose 0.2% to 3.9%
- There was a general softness now for several months – and consumers trends appears to be less spending (see graphs below). This is a subtle sign for recession watchers even though PCE is not a good tool to track the economy.
- The market looks at current values (not real) and was expecting a PCE rise of 0.1% (versus 0.0% actual), and a rise in DPI of 0.0% to 0.1% (versus 0.2% actual).
- this data is very noisy and as usual includes backward revision making real time analysis problematic.
Econintersect believes year-over-year trends are very revealing in understanding economic dynamics. Again, there was a broad 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. Per capita spending has been decreasing for the last two months.
Seasonally and Inflation Adjusted Income Per Capita
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. Roughly, expenditures are growing 1.5% faster than income since 2007.
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. 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 now in a three month down trend.
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 changed by backward revision – please note the degradation in the expenditures (PCE):
Estimates have been revised for January through April. Changes in personal income, currentdollar and chained (2005) dollar DPI, and current-dollar and chained (2005) dollar PCE for March and April — revised and as published in last month’s release — are shown below.
Although improving in March, April and May, 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.
Personal Savings as a Percentage of Disposable Personal Income
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.