Higher Savings Rate Contributed to Poor PCE Numbers in December 2011

December 2011 Personal Consumption Expenditure (PCE) – the spending of consumers disappointed even though Disposable Personal Income (DPI) rose significantly:

  • PCE fell an inflation and seasonally adjusted 0.1% month-over-month
  • DPI rose and inflation and seasonally adjusted 0.5% month-over-month
  • the personal savings rate (expressed as a percentage of DPI) rose 0.5% to 4.0%
  • The market expected a PCE rise of 0.0% to 0.1%, and a rise in DPI of only 0.4%

All the great increases in personal spending in November 2011 were cut in half by backward revision.   This index is subject at times to significant backward revision (see caveats below).

For those worried about the gap between income and expenditure, since January 2007 income has risen 3.5% while expenditures have risen only 3.0%.  Keeping it real, per capita inflation adjusted income was $32,682 in January 2007 – and was $32,458 in this December 2011 data.

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 as 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.  This index has shown negative growth several times since the end of the 2007 recession.  The overall trend since August 2009 is slightly negative.  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 is now becoming “less good”.

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

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

Personal income increased $61.3 billion, or 0.5 percent, and disposable personal income (DPI) increased $47.1 billion, or 0.4 percent, in December, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) decreased $2.0 billion, or less than 0.1 percent. In November, personal income increased $7.4 billion, or 0.1 percent, DPI decreased $4.1 billion, or less than 0.1 percent, and PCE increased $11.4 billion, or 0.1 percent, based on revised estimates.

Real disposable income increased 0.3 percent in December, in contrast to a decrease of less than 0.1 percent in November. Real PCE decreased 0.1 percent, in contrast to an increase of 0.1 percent.

Personal savings rate jumped significantly in December.  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.

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 not available. Econintersect has concerns that seasonally adjusted data is not accurate in the New Normal.

The above graph 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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