Written by Steven Hansen
The data continues to be affected by the pandemic and the stimulus payments. Expenditures improved month-over-month (and is in expansion year-over-year) whilst income also improved month-over-month and is in expansion year-over-year.
Analyst Opinion of Personal Income and Expenditures
The note from the BEA says it all:
The estimate for March personal income and outlays was impacted by the continued government response to COVID-19. Economic impact payments associated with the American Rescue Plan Act of 2021 (which was enacted on March 11, 2021) were distributed in March. The full economic effects of the COVID-19 pandemic cannot be quantified in the personal income and outlays estimate because the impacts are generally embedded in source data and cannot be separately identified.
The increase in personal income in March largely reflected an increase in government social benefits (table 3). Within government social benefits, “other” social benefits increased. The American Rescue Plan Act established an additional round of direct economic impact payments to households. The $616.0 billion increase in current dollar PCE in March reflected an increase of $403.0 billion in spending for goods and a $213.1 billion increase in spending for services (table 3). Within goods, both nondurable (led by “other” nondurable goods, which includes recreational items like games, toys, and hobbies) and durable goods (led by motor vehicles and parts) contributed to the increase. Within services, the largest contributor to the increase was spending for food services and accommodations.
The real issue with personal income and expenditures is that it jumps around because of backward revisions – and one cannot take any single month as fixed or gospel. This month’s backward revision:
Estimates have been updated for January and February. Revised and previously published changes from the preceding month for current-dollar personal income, and for current-dollar and chained (2012) dollar DPI and PCE, are shown below.
This should be considered a better report than last month.
- The market looks at current values (not real inflation-adjusted) and was expecting (from Econoday):.
| Consensus Range | Consensus | Actual | |
| Personal Income – M/M change | 8.8 % to 22.5 % | 20.3 % | +21.1 % |
| Consumer Spending – M/M change | 3.0 % to 6.5 % | 4.0 % | +4.2 % |
| PCE Price Index — M/M change | 0.3 % to 0.5 % | +0.4 % | +0.5 % |
| PCE Price Index Y/Y change | 1.8 % to 2.4 % | +2.3 % | +2.3 % |
| Core PCE Price Index – M/M change | 0.2 % to 0.4 % | +0.3 % | +0.4 % |
| Core PCE price index – Yr/Yr change | 1.7 % to 1.8 % | +1.8 % | +1.8 % |
- Real Disposable Personal Income is up 29.3 % year-over-year, (up 21.1% month-over-month) and real consumption expenditures are up 8.5 % year-over-year (up 4.2 % month-over-month)..
- The latest 1Q2021 GDP estimate indicated the economy was expanding at 6.4 % (quarter-over-quarter compounded). Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time – consumer income and expenditure grow at the same rate.
- The savings rate is 27.6 % (up from last month’s 13.9 %) – this rate was elevated because many investments have been turned into cash.
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The inflation-adjusted income and consumption are “chained”, and the headline GDP is inflation-adjusted. This means the impact on GDP is best understood by looking at the chained numbers. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics.
Per capita, inflation-adjusted expenditure is in contraction.
Seasonally and Inflation-Adjusted Expenditure 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 over time.
Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)
The short-term trends are mixed depending on the periods selected.
Seasonally Adjusted Spending’s Ratio to Income (a declining ratio means the 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).
Seasonally and Inflation-Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)
Econintersect and GDP use 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 Consumption Expenditures (blue line)
Yet year-over-year growth for income and expenditures is above GDP year-over-year growth.
Seasonally & Inflation Adjusted Year-over-Year Change – Personal Disposable Income (red line) and Personal Consumption Expenditures (blue line)
The savings rate has been bouncing around – but the general trend is down since the beginning of this year. 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.
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). We should note that the inflation adjustment is for PCE and Personal Income is usually lower than the ones used for GDP and 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 minus 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 minus 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. 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.
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