Personal Income and Expenditures Growth Frozen in April 2011

by Steven Hansen & Doug Short

Personal Income and Personal Income Expenditures (PCE) is a backward look at the economy.  What is important is to figure out where the economy is headed.  Looking at the April 2011 data alone, it is difficult.

Personal income increased $46.1 billion, or 0.4 percent, and disposable personal income (DPI) increased $35.1 billion, or 0.3 percent, in April, according to the Bureau of Economic Analysis.  Personal consumption expenditures (PCE) increased $41.5 billion, or 0.4 percent.

The headline data does not consider inflation.  With inflation considered income is up 0.0%, and expenditures up 0.1%.  If you consider the population is growing, the numbers are flat to negative.

But the overall concern of Econintersect is seasonality.  Analysts generally look at seasonally adjusted data.  Since 2008 (the new normal era) April PCE numbers have been flat or negative.

One way to try to smooth out short-term seasonality effects is to average the data, as in the following graph.

This chart is telling us the trend line is flat – and that the low personal consumption (PCE) growth rate is unchanged in April at approximately 2.4% annual rate.  Adjusting for population growth the growth rate is about 1.4% annually and has been hovering around that level for more than a year.   Projecting forward (and lacking data to the contrary), it is assumed that this trend will hold.

A Detailed Look Into the April 2011 Data

The Headline PCE index annualized rate has increased from last month’s downwardly revised 1.82% (previously 1.85%) to 2.19%. The Core PCE index increased slightly from last month’s downwardly revised 0.86% (previously 0.88%) to 1.01%.

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 2.2% for headline and 1.0% 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 price increases in oil and gasoline, although now off their interim highs, 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.

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