July 2012 Real Personal Consumption Strong, No Recession

Written by Steven Hansen

July 2012 Real Personal Consumption Expenditure (PCE) – the inflation adjusted spending of consumers – grew strongly more than offsetting last month’s contraction. Disposable Personal Income (DPI) has now risen most of 2012, and also grew strongly:

  • There was a general softness now for several months for most of 2012 in spending – one good month is not a trend (see graphs below). However, this strong growth should dispel any recession thoughts.
  • The market looks at current values (not real) and was expecting a PCE rise of 0.5% (versus 0.4% actual), and a rise in DPI of 0.2% to 0.3% (versus 0.3% actual).
  • this data is very noisy and as usual includes backward revision making real time analysis problematic.

Econintersect believes year-over-year trends are very revealing in understanding economic dynamics. Again, there was a broad revision this month in the data for the last six months, which is explained below (see caveats below).

Keeping it real, per capita inflation adjusted income continues to grow year-over-year, but remain below the recession peak. 

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.

Indexed to Jan 2000, Growth of Real Disposable Income (blue line) to Real Expenditures (red line)

The consumer was since mid 2010 was continuing to spend more of his income (and therefore saving less) – but in 2012 this trend has reversed, and now the consumer is spending less of its income.

Seasonally Adjusted Spending’s Ratio to Income (a declining ratio means 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. This index has shown negative growth several times since the end of the 2007-09 recession. PCE is a fairly noisy index and subject at times to significant backward revision (see caveats below).

Seasonally and Inflation Adjusted Year-over-Year Change of Personal Consumption Expenditures (blue line) to GDP (red line)

Econintersect uses 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 Disposable Expenditures (blue line)

And please note that Econintersect’s previous analysis of PCE and DPI has been somewhat changed by backward revision:

Estimates for personal income and DPI have been revised for January through June; estimates for PCE have been revised for April through June. Changes in personal income, current-dollar and chained (2005) dollar DPI, and current-dollar and chained (2005) dollar PCE for May and June — revised and as published in last month’s release — are shown below.

Estimates of wages and salaries were revised from January through June. The revision to firstquarter wages and salaries reflect the incorporation of the most recently available BLS tabulations of the first-quarter wages and salaries from the quarterly census of employment and wages. Revised estimates for April, May, and June reflect extrapolations from the revised first-quarter level of wages. In addition, revisions to May and June reflect revised BLS employment, hours, and earnings data for those months.

The savings rate is now in an uptrend. 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. The graph below is from BEA table 2.6. – and shows a slight reduction in the savings rate for July (although the overall trend is up).

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).

Year-over-Year Change – PCE’s Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green 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. 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 available with a delay of several months.

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