Written by Steven Hansen
January 2013 Real Personal Consumption Expenditure (PCE) – now has gained for three straight months. Real Disposable Personal Income (DPI) fell significantly wiping out months of gains.
- The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.1% to 0.2% (versus 0.2% actual), and a rise in DPI (income) of -2.4% (versus -4.0% actual).
- this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic – and the backward revisions this month was minor but biased to the downside.
- Yesterday’s second estimate of 4Q2013 GDP release showed the economy barely growing.
- The decline in personal income was much larger than anticipated – and wipes out 5 months of inflation adjusted gains. The jump in the previous month was caused by 2012 payouts ahead of anticipated tax changes. This decline should cause many forecaster to revisit their assumptions on economic growth as if the consumer does not have money, it cannot spend.
- The savings rate fell to levels not seen since the beginning of the Great Recession.
The inflation adjusted numbers are chained.
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).
Per capita inflation adjusted expenditure has exceeded the pre-recession peak.
Seasonally and Inflation Adjusted Expenditure Per Capita
Per capita inflation adjusted income still remains under the pre-recession levels this month as the gains last month were wiped out.
Seasonally and Inflation Adjusted Income Per Capita
The graph below illustrates the relationship between income (DPI) and expenditures (PCE) – showing clearly income and expenditures grow at nearly the same rate.
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)
The consumer appears to be 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 (PCE is a component of 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 Econintersect’s previous analysis of PCE and DPI is not significantly changed by this month’s revisions:
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.
The savings rate has been bouncing around in 2012 – and the trend now is uncertain. 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. – and shows a significant jump in savings rate for January.
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)
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.