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May 2018 Headline Personal Income Improves


this month income improved more than spending.

but year-over-year spending still is expanding more than income.

yet trends are spending is slowing whilst income is unchanged.

The headline data this month show good month-over-month growth in income. Expenditures year-over-year growth remaining above income growth with the savings rate remaining historically low (but improved this month).

Analyst Opinion of Personal Income and Expenditures

The savings rate improved but remains near 21st century lows.

The backward revisions this month were relatively small.

  • The market looks at current values (not real inflation adjusted) and was expecting (from Nasdaq / Econoday):
Consensus Range Consensus Actual
Personal Income - M/M change 0.3 % to 0.5 % +0.4 % +0.4 %
Consumer Spending - M/M change 0.3 % to 0.5 % +0.4 % + 0.2 %
PCE Price Index -- M/M change 0.2 % to 0.3 % +0.2 % + 0.2 %
Core PCE price index - M/M change 0.2 % to 0.3 % +0.2 % + 0.2 %
PCE Price Index -- Y/Y change 2.2 % to 2.3 % +2.2 % + 2.3 %
Core PCE price index - Yr/Yr change 1.9 % to 2.0 % +1.9 % + 2.0 %
  • The monthly fluctuations are confusing. Looking at the inflation adjusted 3 month trend rate of growth, disposable income growth rate trend was unchanged while consumption's growth rate is growing.
  • Real Disposable Personal Income is up 1.7 % year-over-year (published 1.9 % last month and revised to 2.0 %), and real consumption expenditures is up 2.3 % year-over-year (published 2.7 % last month and revised to 2.6 %)
  • The 1Q2018 GDP estimate indicated the economy was expanding at 2.0 % (quarter-over-quarter compounded). Expenditures are counted in GDP, and income is ignored as GDP measures the spending side of the economy. However, over periods of time - consumer income and expenditure grow at the same rate.
  • The savings rate continues to be low historically, and improved to 3.2 % this month [last month it was published the savings rate was 2.8 % - and is now revised to 3.0 %].

z pce_table.png

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.

Seasonally and Inflation Adjusted Expenditure Per Capita

​Backward revisions this month:

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

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 - but now consumption is far exceeding income..

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

The short term trends are mixed depending on the periods selected - but spending remains historically elevated.

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).

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 for income and expenditures is below GDP year-over-year growth.

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.

Personal Savings as a Percentage of Disposable Personal Income

And one look at the different price changes seen by the BEA in this PCE release versus the BEA's GDP and BLS's Consumer Price Index (NYSEARCA:CPI). We should note that the inflation adjustment is for PCE and Personal Income is usually lower than the ones used for GDP and CPI.

Year-over-Year Change - PCE's Price Index (blue line) versus CPI-U (red line) versus GDP Deflator (green line)

Finally for recession watchers, here is the graph below, here are the elements used to mark a recession. (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.

If a line falls below the 0 (black line) - that sector is contracting from the previous month. Personal income is the blue line. Note - the below graph uses multipliers to make movements more obvious (ignore the value of the scale, only consider whether the graph is above [good] or below [bad] the zero line).

Month-over-Month Growth Personal Income less transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)

Other Economic News this Week:

The Econintersect Economic Index for July 2018 shows the improvement cycle continues and remains well into territory associated with normal expansions - although this month it forecasts slightly weaker growth. There are continuing warning signs of consumer over-consumption, but the relationship between retail sales and employment improved.

Please visit our landing page for a summary of all of our analysis this past week.

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