U.S. Personal Income, Expenditures Up As Aggregate Demand Keeps Rising

by: Tim Worstall

The point and aim of an economy is the people keep getting better off.

Consumption makes up some 70% of all demand in the economy, meaning that if consumption is rising so, likely, will the whole of it.

Good news therefore that personal income and expenditure continue to rise on both fronts.

Rising Tides Lift The Economy, Even If Not All Boats

It may not be true that the rising tide lifts all boats - that being one of the complaints about the modern economy, that not all do benefit - but it's certainly true that growth in income and expenditure generally boosts the economy. This rather must be so given that we define the economy as being all incomes and or - they should equal each other - all consumption.

As investors we're entirely happy therefore that personal incomes and also personal expenditures continue to rise in the US economy. This is all another brick in our wall of information that tells us there's nothing particularly or specifically wrong with the current economy, that we've no bust looming over the horizon that we can see.

No one piece of this set of information is proof perfect that there are no problems. But economies have to add up and each piece of information does therefore confirm the same story. We've got reasonable growth and we can't quite see any reason why it might be about to stop.

Personal Income And Expenditure Numbers

These come from the Bureau of Economic Analysis. About which they say:

Personal income increased $88.6 billion (0.5 percent) in May according to estimates released today by the Bureau of Economic Analysis. Disposable personal income (DPI) increased$72.6 billion (0.5 percent) and personal consumption expenditures (PCE) increased $59.7 billion (0.4 percent).

Or, in chart form:

Personal income (Personal income and expenditure from BEA)

About These Numbers

The important ones for us are the "chained" measures. These allow us to see what is happening after the effects of inflation. The aim of our having an economy in the first place is that people generally become better off over time. That disposable income (ie, after those must make payments) is rising is evidence of this. We can see that there are ruts in the road, one month's figures can go either way, but over time it is happening, Americans in aggregate are becoming generally richer.

That's nice, obviously, but we're interested here as investors. Rising personal incomes, rising disposable such, means that people are able to buy more. Thus the people who make things - the companies we invest in - are able to sell more.

At least potentially that is. There is always the possibility that the consumer will be spooked by some unknown in the future and will hunker down and stop spending. This can happen, the savings rate can leap. That being a sign that we are going to have a bad immediate economic future. As we can see this also isn't happening. Expenditure (called outlays here) is rising as well.

People are not hunkering down and using higher incomes to pay down debt, or increase savings. Aggregate demand is thus improving along with the economy in general.

It's Aggregate Demand That Matters

As I've mentioned more than once around here it's business investment which is the most variable GDP component. That's usually both the signal and trigger of a recession, a fall there. But that investment is driven by beliefs about the wider aggregate demand. Consumption making up some 70% of that demand for the US. These outlays being just that consumption.

So, personal outlays are increasing as incomes do, aggregate demand is, therefore we've no reason to suspect business investment is about to tail off.

In More Detail

Moody's Analytics gives us a slightly finer reading of these numbers:

Total personal income increased 0.5% in May, matching April's gain. Wages and salaries, the largest component of personal income, rose only 0.2% in May, a slight deceleration from April's 0.3% gain. Similarly, supplements to wages and salaries were up only 0.2%. The more volatile components of personal income drove the headline gain. Receipts on assets jumped 1.6%, while proprietors' income surged 0.8%. Real disposable income growth, which is key for consumer spending, increased 0.3% in May. The personal savings rate was unchanged at 6.1%.

And on the outlays side:

Real spending growth in May was dominated by durable goods, with nondurable goods lagging because of falling gasoline prices. Prices rose 0.2% in May, so nominal spending rose 0.4% after rounding. The saving rate was unchanged at 6.1% in May and was revised lower in prior months.

We're doing fine is the message from this.

State Level Numbers

The above is all national aggregates. We're also interested in whether there are any gross regional variations. In an economy as large as that of the US it's entirely possible to have regional recessions while the national aggregates look just dandy.

Fortunately we've no sign of that:

State personal income increased 3.4 percent at an annual rate in the first quarter of 2019, a deceleration from the 4.1 percent increase in the fourth quarter of 2018, according to estimates released today by the Bureau of Economic Analysis (table 1). Personal income increased in all states except South Dakota. The percent change in personal income across all states ranged from 5.6 percent in West Virginia to -0.6 percent in South Dakota.

Quite what's happened in South Dakota isn't certain but it's a small fall and there really aren't all that many people there either.

In chart form:

State income (Personal income by state from BEA)

About this Moody's Analytics says:

State personal income climbed 3.4% on an annualized basis in the first three months of this year, which marked a deceleration from the 4.1% pace from the previous quarter. A fall in dividends, interest and rents, and a slowdown in net earnings growth was behind the deceleration. Dividends, interest and rents suffered as after-tax corporate profits fell slightly in the first three months of the year, and both short- and long-term Treasury yields were flat during this time.

Two things to note here. Firstly, we only break out the state numbers on a quarterly basis, unlike the monthly for the national numbers. The second is that its capital income which has fallen, not labor. Given that labor income is the very much more important component of aggregate demand that means that even the slowing isn't going to have much effect on that consumer demand.

To Recap The Numbers

We have no sign of any major difficulty in any one or more regions of the US economy. Personal incomes and outlays continue to rise. Aggregate demand thus continues to grow. We're just not seeing any sign of the economic expansion coming to an end. Nor any reason why businesses should think it's about to and thus they curtail their investments.

Our Investor Takeaway

As ever with these macroeconomic numbers we're trying to time the business cycle. We're trying to catch, trying to divine the moment, when the economy is on the turn. The vast majority of the time the answer will be "not yet". Which is what we're seeing here. Growth in incomes and spending carries on.

We can and should continue to invest on specific circumstances, not on the basis of some turn in the macro economy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.