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What Is Wrong With Personal Income?

Real Personal Consumption Expenditure (PCE) grew while Real Disposable Personal Income (DPI) contracted. Income continues to fall further behind the rate of increase of spending.

  • The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.2% (versus 0.4% actual), and a rise in DPI (income) of 0.0% to 0.2% (versus 0.0% actual). In other words, expenditures were above expectations whilst income was at the lower end of expectations.
  • The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth, income trend is down, whilst expenditures are trending up.
  • Real Personal Income is contracting (down 2.7% year-over-year), and real personal expenditures are up 2.5% year-over-year. The gap between income and expenditures widened again this month.
  • this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic - however the backward revisions this month are very slight.
  • Earlier this week, the advance estimate of 4Q2013 GDP indicated the economy was growing at 3.2%. Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time - income and expenditure must grow at the same rate. Usually this differential signals a future slowdown of consumer spending growth.
  • The savings rate continues to be low, and again declined marginally this month.

The inflation adjusted income and consumption are "chained", and headline GDP is inflation adjusted. This means the impact to GDP is best understood by looking at the chained numbers. Econintersect believes year-over-year trends are very revealing in understanding economic dynamics.

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)

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 (PCE is a component of GDP). 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 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)

FRED Graph

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 3.9% - now down three months in a row

Personal Savings as a Percentage of Disposable Personal Income

The Econintersect economic forecast for February 2014 continues to confirm a moderately improving economy without the roller coaster effect seen from the end of the Great Recession to mid 2013. Is this suggesting 2014 will be a good year? - This remains to be seen.

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 326,000 (reported last week) to 348,000 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 - marginally worsened from 331,500 (reported last week) to 333,000. 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), 2014 (orange line)

Bankruptcies this Week: none

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