October 2011 Personal Consumption Increased, but Income Increased More

Personal Consumption Expenditure (PCE) – the spending of consumers – rose an inflation and seasonally adjusted 0.1% month-over-month in October 2011. This follows the September PCE which showed the largest monthly increase since December 2009.

Inflation and seasonally adjusted Disposable Personal Income (DPI) rose 0.3% month-over-month. For those worried about the gap between income and expenditure, since January 2007 income has risen 3.4% while expenditures have risen only 3.1%.

Keeping it real, per capita inflation adjusted income is down 0.8% since Jan 2007.

PCE is the spending of consumers.  In the USA, the consumer is the economy. Likewise, personal income is the money consumers earn to spend.

PCE is a fairly noisy index and subject at times to significant backward revision (see caveats below). Econintersect views this data using a three month moving average which has a relatively steep positive trend in play.

The summary table follows, and Econintersect follows the inflation adjusted (chained) numbers. Disposable Personal Income (DPI) is the income left after the tax man.

From the Bureau of Economic Analysis press release on DPI and PCE movements:

Real DPI — DPI adjusted to remove price changes — increased 0.3 percent in October, in contrast to a decrease of 0.1 percent in September.

Real PCE — PCE adjusted to remove price changes — increased 0.1 percent in October, compared with an increase of 0.5 percent in September. Purchases of durable goods increased 0.9 percent, compared with an increase of 3.3 percent. Purchases of nondurable goods increased 0.2 percent, compared with an increase of 0.4 percent. Purchases of services decreased less than 0.1 percent, in contrast to an increase of 0.1 percent.

A side note – personal savings had been falling for the previous three months, increased slightly in October 2011.

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 (updated through September 2011) 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 not available. Econintersect has concerns that seasonally adjusted data is not accurate in the New Normal.

The above graph (updated through September 2011) plots year-over-year data instead of month-over-month which is likely a more accurate approach to understanding PCE. Again, this is seasonally adjusted data – and there should NOT be continuing occurrence of year-over-year single month blips every few months (red circles on above graph).

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