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What Happened To Consumer Income In October?

I think the significant news this week was the decline in personal income - and the spending spree accompanying it. Here is part of my post I made on this subject.

  • The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.3% (versus 0.3% actual), and a rise in DPI (income) of 0.3% to 0.5% (versus -0.2% actual). In other words, expenditures were at expectations whilst income was well under expectations.
  • The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth, income trend is relatively flat, whilst expenditures are trending up.
  • Real Personal Income is up 1.8% year-over-year, and real personal expenditures are up 2.1% year-over-year. The gap between income and expenditures opened up again this month.
  • this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic - and the backward revisions this month are moderate.
  • Earlier this week, the second estimate of 3Q2013 GDP indicated the economy was growing at 3.6%.
  • The savings rate continues to be low, and declined marginally this month.

The long term trend is that the consumer is spending more of its income - but the 2013 trend is that 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)

Econintersect and GDP 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 Consumption Expenditures (blue line)

Yet year-over-year growth is not exceptional with both consumption and income below GDP growth - and income growth still lagging consumption.

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. 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 significant fall in savings rate for January 2013 - and now a recovery is continuing. The savings rate is now 4.8% - now down two months in a row

Personal Savings as a Percentage of Disposable Personal 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.

The Econintersect economic forecast for December 2013 again improved. What this forecast cannot see is the real effect of austerity and Obamacare - but it does see that business is betting the effects on the economy will be minimal.

The ECRI WLI growth index value has been weakly in positive territory for over four months - but in a noticeable improvement trend. The index is indicating the economy six month from today will be slightly better than it is today.

Current ECRI WLI Growth Index

Initial unemployment claims went from 316,000 (reported last week) to 298,000 this week. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate. The real gauge - the 4 week moving average - improved from 331,750 (reported last week) to 322,250. Because of the noise (week-to-week movements from abnormal events AND the backward revisions to previous weeks releases), the 4-week average remains the reliable gauge.

Weekly Initial Unemployment Claims - 4 Week Average - Seasonally Adjusted - 2011 (red line), 2012 (green line), 2013 (blue line)

Bankruptcies this Week: OCZ Technology Group

[For a complete list of posts we have made his week - click here]

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.