By Doug Short and Steven Hansen
From the March 2011 Personal Income and Outlays published today by the Bureau of Economic Analysis (BEA) it seems the consumer is back – until you start analyzing that most of the increases are due to rising prices.
Personal income increased $67.0 billion, or 0.5 percent, and disposable personal income (DPI) increased $64.4 billion, or 0.6 percent, in March, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $60.7 billion, or 0.6 percent. In February, personal income increased $53.1 billion, or 0.4 percent, DPI increased $49.6 billion, or 0.4 percent, and PCE increased $94.4 billion, or 0.9 percent, based on revised estimates.
Real disposable income increased 0.1 percent in March, compared with an increase of less than 0.1 percent in February. Real PCE increased 0.2 percent, compared with an increase of 0.5 percent.
When viewing the Personal Consumption Expenditures (PCE) using chained (inflation adjusted or “real”) dollars over the past year, the increase of 0.2% MoM is rather small – and durable goods expenditures actually fell.
The chained dollar factors are tabulated by the BEA in the NIPA table 2.8.7 and labeled Percent Change from Preceding Period in Prices – or in short the PCE Price Index.
The chart below shows the monthly year-over year change in the personal consumption expenditures (PCE) price index since 2000 – including an overlay of the Core PCE (less Food and Energy) price index, which is a key measure watched by the Fed as a gauge of inflation.
The Headline PCE index annualized rate has increased from last month’s upwardly revised 1.60% to 1.85%. The Core PCE index decreased slightly from last month’s upwardly revised 0.91% to 0.88%.
The index data has been calculated to two decimal points to highlight the change more accurately. The mainstream media will report the annualized rate as 1.8% for headline and 0.9% for core.
It may seem trivial to focus such detail on numbers that will be revised again next month (the three previous months are subject to revision). But PCE is a key measure of inflation for the Federal Reserve, and the recent price increases in oil and gasoline puts consumer behavior in the spotlight.
A core PCE range of 1.75% to 2% is generally mentioned as the target for the Federal Reserve’s price-stability mandate.
For a long-term perspective, here are the same two metrics spanning five decades.
The price index’s increase in March 2011 on a historical basis is relatively small. Inflation was much higher in the past – but so was the relative increase in disposable personal income. The consumer is being boxed in by price increases and fixed income.
The consumer is able to drive this economic expansion cycle only weakly. Historically, expansion cycles were consumer driven. The recovery from the 2007 recession was first driven by the government and then the business sector. Today’s 1Q2011 GDP showed the government is now a drag on the economy.
The business sector seems to be the only hope to drive a moderate economic expansion.
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