January 2014 Real Personal Income And Expenditures Above Expectations

Real Personal Consumption Expenditure (PCE) grew while Real Disposable Personal Income (DPI) contracted. This release shows that the December data (previous month) was distorted by a previous year’s income spike – and that income and expenditure growth correlated this month.

 

• The market looks at current values (not real inflation adjusted) and was expecting a PCE (expenditures) rise of 0.0% to 0.3% (consensus 0.1%) versus 0.4% actual, and a rise in DPI (income) of 0.0% to 0.4% (consensus 0.2%) versus 0.4% actual. In other words, expenditures and income were above expectations.
• The monthly fluctuations are confusing. Looking at the 3 month trend rate of growth, both income and expenditures are trending up.
• Real Personal Income is contracting (up 2.8% year-over-year), and real personal expenditures are up 2.2% year-over-year. The gap between income and expenditure growth remains – and did not statistically widen this month. Expenditures are growing faster than income.
• this data is very noisy and as usual includes backward revision (detailed below) making real time analysis problematic – the backward revisions this month were moderate.
• Last week, the second estimate of 4Q2013 GDP indicated the economy was growing at 2.4% (revised down from 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, but was statistically unchanged this month.

 

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.