August 2019 Headline Consumption Expenditures Growth Rolling Averages Slowed

Sep. 27, 2019 1:41 PM ET2 Comments
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Steven Hansen (A.K.A "The Hand") was born, raised and educated in California. Steven worked for 25 years for a major international engineering and construction corporation. He has lived outside of the USA almost continuously since 1978. Steven retired in 1995 to sail the world. He is still sailing today and is currently located in Malaysia. On the financial side, Steven is a pragmatist. His motto is to "go with the flow" and believes that the only correct investing method is one which makes you money both short and long term. He does not fall in love with philosophies – only results. He has invested well enough to retire at 45 and stay retired.


  • Income growth continues to outpace spending.
  • The savings rate remains in a tight range in 2019.
  • In this series, Real Disposable Personal Income is up 3.0 % year-over-year.

Consumer income growth year-over-year is now higher than the spending growth year-over-year.

The savings growth rate improved and has remained in a narrow band in 2019.

The real issue with personal income and expenditures is that it jumps around because of backward revisions - and one cannot take any single month as fixed or gospel.

  • The market looks at current values (not real inflation-adjusted) and was expecting (from Econoday):.
Consensus Range Consensus Actual
Personal Income - M/M change 0.3 % to 0.8 % +0.4 % +0.4 %
Consumer Spending - M/M change 0.2 % to 0.4 % +0.3 % +0.1 %
PCE Price Index -- M/M change 0.1 % to 0.3 % +0.2 % +0.0 %
Core PCE price index - M/M change 0.1 % to 0.2 % +0.2 % +0.1 %
PCE Price Index -- Y/Y change 1.4 % to 1.6 % +1.5 % +1.4 %
Core PCE price index - Yr/Yr change 1.7 % to 1.8 % +1.8 % +1.6 %
  • The monthly fluctuations are confusing. Looking at the inflation-adjusted year-over-year 3-month trend rate of growth, disposable income growth rate trend improved while consumption's growth rate trend declined.
  • Real Disposable Personal Income is up 3.0 % year-over-year, and real consumption expenditures are up 2.3 % year-over-year.
  • The latest 2Q2019 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 is 8.1 % (slightly up from last month's revised 7.7 %.

z pce_table.png

The inflation-adjusted income and consumption are "chained", and the headline GDP is inflation-adjusted. This means the impact on 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

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.

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.

Seasonally Adjusted Spending's Ratio to Income (a declining ratio means the 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 use 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 since the beginning of this year. 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 (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 minus 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 minus transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)

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

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