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Steven Hansen
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Steven Hansen is an international business and industrial consultant specializing in turning around troubled business units; consults to governments to optimize process flows; and provides economic indicator analysis based on unadjusted data and process limitations.
My company:
Econintersect LLC
My blog:
Global Economic Intersect
  • What Is Wrong With Personal Income? 5 comments
    Feb 1, 2014 8:42 PM

    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.

    (click to enlarge)

    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)

    (click to enlarge)

    Bankruptcies this Week: none

    {click here} to view all the economic news and opinion this week.

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

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Comments (5)
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  • JT4041
    , contributor
    Comments (98) | Send Message
    Thanks again Steve for the info. and analysis.
    1 Feb 2014, 09:55 PM Reply Like
  • omarbradley
    , contributor
    Comments (966) | Send Message
    what is documented is the move out of equities and into treasuries as people retire.
    since very little wealth has in fact been created over the last thirty years that could wind up being a substantial move out of equities and into treasuries actually.
    it is true...the Fed is now winding down QE...but this is also known as "stimulus" (for Wall Street) and thus is growth negative in my view.
    We do have a massive energy boom going on inside the United States and as well a technology upgrade cycle.
    Three dimensional printing carries with it a very real possibility of a dramatic decline in production costs and massive increase in productivity ala the Industrial Revolutions of the 19th Century.
    We also have a revolution in the materials space well underway with the use of carbon fiber composite materials.
    if this is the front end of a large disinflation it need not be a bad thing since we have so much Government support now.
    The dollar has also soared in value so it's really hard to argue something truly transformative isn't going on multiple levels and on multiple fronts.
    I see no reason why the US economy can't grow significantly faster with little to no inflation. I think the only thing we're missing is simply pointing out the tremendous success stories of the various political economies within the Union.
    1 Feb 2014, 11:06 PM Reply Like
  • Moon Kil Woong
    , contributor
    Comments (13549) | Send Message
    It is hard to call a recovery when household income is stagnant, employment is dropping, and interest rates have been rising. I don't know what people have been talking about a strengthening economy since the end of 2013. Maybe they stopped counting the green stuff called money and are rather talking about the strong growth in marijuana sales because the US Economy is stalling. The growth you are seeing is a reflection of higher interest rates caused by the US having to raise treasury rates which is obviously bad for growth.


    Don't be deluded into betting on a strong economy in 2014. If Yellen cancels QE it will be an admission that the US is permanently addicted to QE And its economy is much worse off than one would suspect. And if she doesn't, the banks will do all they can to cause a economic collapse so they can get more QE and keep zirp. Inevitably 2014 will be a war between the banks wanting eternal easy money even at the cost of the economy versus those that realize that the path we are treading is not sustainable and we must correct before another economic downturn hits us. While we remain clinging to zirp and QE there is no more lifejacket the federal reserve really has to help us.


    People believe in the Bernanke, Greenspan, Yellen put, but they fail to realize the put has already been used. At this rate the Federal Reserve will look worse than Lehman as its balance sheet levers them past 40. No wonder China and other more balanced foreign investors want to flee US Treasuries. And no wonder the Federal Reserve can't get enough Americans to buy the trash as well.


    Inevitably their only hope to do so is to trash the economy and start sucking the stock market and private sector dry of assets to plug the treasury bond auctions.
    2 Feb 2014, 06:29 AM Reply Like
  • JT4041
    , contributor
    Comments (98) | Send Message
    Moon - Very well said and I agree 100%. These people who see the economy as strengthening are either ignoring or not looking at the details and/or believing the propaganda spouted by the Government and talking heads on TV. It may take a few months, but at some point Yellen will not be able to maintain the tapering of QE and will likely be forced to increase it as the economic numbers start getting get worse.. and they will get worse as the effects of QE withdrawal start showing. We are in the economic shitter..and this may be year the bowl flushes..
    2 Feb 2014, 01:01 PM Reply Like
  • bikerron1
    , contributor
    Comments (699) | Send Message
    All you need to know. Household income is stagnant, and so are good paying jobs. And it's here to stay.
    3 Feb 2014, 05:12 AM Reply Like
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