Earlier today I posted my monthly update of the year-over-year change in the Personal Consumption Expenditures (PCE) price index since 2000 and Steve Hansen posted his analysis . My focus was on PCE data as a measure of inflation. Now let’s look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: Disposable Income Per Capita. The first chart shows both the nominal per capita disposable income (DPI) and the real (inflation-adjusted) equivalent since 2000.
The Bureau of Economic Analysis (BEA) use the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let’s compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we’re doing on New Year’s Eve at the turn of the millennium? Nominal disposable income is up 48.1% since then. But the real purchasing power of those dollars is up a mere 16.8%. In fact, the month-over-month real income in February declined 0.15%, which might have contributed to last week’s ugly Michigan Consumer Sentiment Index.
These charts offer a “realistic” sense of how the U.S. consumer is faring. They tell a rather different story from the spin I’ve seen elsewhere today, which focuses on an increase in consumer spending (not surprising given the rise in gasoline prices):
- Bloomberg: U.S. Consumer Spending Increases More Than Forecast
- CNBC: Consumer Spending Rises Amid Higher Gas Prices
Bottom line, the consumer is spending more but with fewer real dollars.
Most of the increase in DPI occurred before the end of 2006. Over that seven year period the growth was approximately 15.2%. In the 4+ years since the increase has been approximately 1.6%. That is a 2.0% annual growth rate compounded for the first seven years and 0.4% annual compounded rate for the past four years and two months.
However, there is one reason to view the data more favorably: the growth rate in recent months . The past 7 months have had success to the extent that there has been real DPI per capita growth greater than 1% annual rate for the first time since the first half of 2008. The last two months have had annual growth rates of 2.1%(January) and 1.9% (February).
The history before 2000 is seen in the following graph from the St. Louis Fed.
The deeper history reveals that the recent “good” DPI per capita growth rates are not very impressive compared to what was experienced prior to 1990. This is revealed in the following graph from my colleague John Lounsbury.
This pattern is similar to the overall personal income patterns over the past 50 years.
Note: My source for the recent data is the BEA Table 1 in the full release available here. Earlier data is from FRED, the St. Louis Federal Reserve database: available here.
Personal Consumption Expenditures for February by Doug Short (at dshort.com)
February 2011 Personal Income & Expenditures Improve by Steven Hansen
The Consumer is Depressed by Doug Short
U.S. Problems are Institutional by John Lounsbury