Written by Steven Hansen
June 2012 Real Personal Consumption Expenditure (PCE) – the inflation adjusted spending of consumers – is now contracting. Disposable Personal Income (DPI) has now risen most of 2012:
- There was a general softness now for several months in spending – 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 0.1% (versus 0.0% actual).
- I have no idea why everyone does not watch REAL (inflation adjusted) spending – as GDP we watch is REAL GDP.
- 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 three months.
Seasonally and Inflation Adjusted Expenditure Per Capita
The graph below illustrates the relationship between income (DPI) and expenditures (PCE).
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)
The consumer was since mid 2010 was continuing to spend more of his income (and therefore saving less) – but in 2012 this trend has reversed, and now the consumer is spending less of its income.
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).
Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)
Econintersect 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 Disposable Expenditures (blue line)
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):
Personal income was revised down for all 3 years: $63.2 billion, or 0.5 percent, for 2009; $51.6 billion, or 0.4 percent, for 2010; and $43.9 billion, or 0.3 percent, for 2011. For 2009, downward revisions to personal dividend income, to rental income of persons, and to personal interest income were partly offset by an upward revision to nonfarm proprietors’ income. For 2010, a downward revision to personal dividend income was partly offset by upward revisions to nonfarm proprietors’ income and to personal interest income. For 2011, downward revisions to personal dividend income, to government social benefits to persons, and to farm proprietors’ income were partly offset by upward revisions to nonfarm proprietors’ income, to supplements to wages and salaries, and to personal interest income.
Disposable personal income (DPI) was revised down for all 3 years: $66.4 billion, or 0.6 percent, for 2009; $52.6 billion, or 0.5 percent, for 2010; and $44.2 billion, or 0.4 percent, for 2011. Personal current taxes was revised up for all 3 years: $3.2 billion for 2009, $0.9 billion for 2010, and $0.3 billion for 2011. The percent change from the preceding year in real DPI was revised down from a decrease of 2.3 percent to a decrease of 2.8 percent for 2009, was unrevised at 1.8 percent for 2010, and was revised up from an increase of 1.2 percent to an increase of 1.3 percent for 2011.
Personal outlays was revised down $22.0 billion for 2009, was revised down $26.5 billion for 2010, and was revised up $4.8 billion for 2011. For 2009 and 2010, downward revisions to PCE accounted for most of the revisions to personal outlays. For 2011, upward revisions to personal interest payments and to PCE were partly offset by a downward revision to personal current transfer payments to government.
The personal saving rate was revised down for all 3 years: from 5.1 percent to 4.7 percent for 2009, from 5.3 percent to 5.1 percent for 2010, and from 4.6 percent to 4.2 percent for 2011.
The savings rate is now in an uptrend. 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
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).
Year-over-Year Change – PCE’s Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green 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.