Steven Hansen's  Instablog

Steven Hansen
Send Message
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
  • A Growing Headwind To 2Q2014 GDP 1 comment
    Jun 28, 2014 8:11 AM

    We are seeing a slowing of consumer spending. Same as last month - Real Personal Consumption Expenditure (PCE) declined, RealDisposable Personal Income (DPI) grew month-over-month, and the rate of saving grew. This continues not to bode well for second quarter GDP.

    • The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth, income is trending up whilst expenditures continues to trend down.
    • Real Personal Income is up 1.9% year-over-year, and real personal expenditures is up 1.9% year-over-year. The gap between income and expenditure growth again marginally closed this month.
    • this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic - the backward revisions this month was moderately up to both REAL income and expenditures.
    • Yesterday, the third estimate of 1Q2014 GDP indicated the economy was contracting at 2.9%. 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 - which is what is occurring now.
    • The savings rate continues to be low, but improved this month 0.3% explaining the decrease in consumption.

    (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.

    Per capita inflation adjusted expenditure has exceeded the pre-recession peak but declined again this month.

    Seasonally and Inflation Adjusted Expenditure Per Capita

    Per capita inflation adjusted income is above pre-recession levels.

    Seasonally and Inflation Adjusted Income Per Capita

    Backward revisions this month:

    Estimates have been revised for January through April. Changes in personal income, in current-dollar and chained (2009) dollar DPI, and in current-dollar and chained (2009) dollar PCE for March and April -- revised and as published in last month's release -- are shown below.

    (click to enlarge)

    The graph below illustrates the relationship between income (DPI) and expenditures (PCE) - showing clearly income and expenditures grow at nearly the same rate over time. In dollar terms, expenditures are growing faster than consumer income - and this is not positive for long term economic growth.

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

    The long term trend remains that the consumer is spending more 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 not very noisy compared to GDP, but 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 4.8% - last month was 4.5% - and remains in a general down trend (saving less) even though the savings rate improved this month.

    Personal Savings as a Percentage of Disposable Personal Income

    Other Economic News this Week:

    The Econintersect Economic Index for June 2014 is showing continued growth acceleration. Outside of our economic forecast - we are worried about the consumers' ability to expand consumption because the ratio between income and expenditures is near all time highs. The GDP contraction for 1Q2014 is a paper contraction as GDP is determined by playing games with accounts. No serious element of the economy was in contraction (except government spending) which is already expanding in the 2Q2014.

    The ECRI WLI growth index value has been weakly in positive territory for many months - but now 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

    The market was expecting the weekly initial unemployment claims at 305,000 to 315,000 (consensus 310,000) vs the 312,000 reported. The more important (because of the volatility in the weekly reported claims and seasonality errors in adjusting the data) 4 week moving average moved from 312,250 (reported last week as 311,750) to 314,250.

    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: Revel AC, Privately-held Nautilus Holdings, Privately-held Source Home Entertainment

    For all the analysis of economic events this week [click here].

    Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Back To Steven Hansen's Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (1)
Track new comments
  • Angel Martin
    , contributor
    Comments (1372) | Send Message
    good article ! good summary !
    28 Jun 2014, 09:25 AM Reply Like
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.