August Personal Income up 0.3%; PCE on Track to Add 2.03 Percentage Points to GDP

0ther than the employment report and the GDP report itself, the monthly report on Personal Income and Outlays from the Bureau of Economic Analysis is probably the most important economic release we see monthly, as it gives us the monthly data on our personal consumption expenditures (PCE), which accounts for more than 2/3rds of GDP, and the PCE price index, the inflation gauge the Fed targets, and which is used to adjust that personal spending data for inflation to give us the relative change in the output of goods and services that our spending indicated.  This report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate.  However, the dollar change reported for each of those are not the current monthly change; rather, they're seasonally adjusted and at an annual rate, ie, they tell us how much income and spending would increase for a year if August's adjusted income and spending were extrapolated over an entire year.  Confusingly, however, the percentage changes are computed monthly, from one annualized figure to the next, and in this case of this month's report they give us the percentage change in each annualized metric from July to August..

Thus, when the opening line of the press release for this report tell us "Personal income increased $52.5 billion, or 0.3 percent, and disposable personal income (DPI) increased $47.1 billion, or 0.4 percent, in August", they mean that the annualized figure for all types of personal income in August, $15,403.8 billion, was $52.5 billion or 0.3% greater than the annualized personal income figure of $15,351.3 billion for July; the actual August increase in personal income over July is not given.  Similarly, disposable personal income, which is income after taxes, rose by 0.4%, from an annual rate of $13,408.8 billion in July to an annual rate of $13,456.0 billion in August.  The contributors to the increase in personal income, listed under "Compensation" in the press release, are also annualized amounts, all of which can be seen in the Full Release & Tables (PDF) for this release, the document we'll be referencing.  Therefore, when the press release says, "Wages and salaries increased $35.6 billion in August", that really means wages and salaries would rise by $35.6 billion over an entire year if August's seasonally adjusted increase were extrapolated over an entire year, just as interest and dividend income, another contributor to the income increase, rose at a $5.2 billion annual rate in August. So you can see what's written in the press release is somewhat confusing and often misreported, which is why we reference the pdf... 

For the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased by $54.9 billion, or more than 0.4 percent, which means the annual rate of PCE rose from $12,333.9 billion in July to $12,388.8 in August. In addition, the July PCE figure was revised up from the originally reported $12,305.4 billion annually, and prior months were revised up as well.  The current dollar increase in August spending was driven by a $39.0 billion annualized increase to an annualized $8,342.3 billion in spending for services and a $11.7 billion increase to $1,346.7 billion annualized in spending for durable goods.  Outlays for non durable goods also increased at a $4.1 billion annual rate to an annualized $2,699.8 billion.  Total personal outlays for August, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $55.2 billion to $12,840.4 billion, which left total personal savings, which is disposable personal income less total outlays, at $615.6 billion in August, down from the revised $623.6 billion in personal savings in July.  As a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 4.6% from July's savings rate of 4.7%... 

As you know, before personal consumption expenditures are used in the GDP computation, they must first be adjusted for inflation to give us the real change in consumption, and hence the real change in goods and services that were produced for that consumption..  That adjustment is done with the price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, also included in this report.  Looking at Table 9 in the pdf, we see that that index rose from 109.765 in July to 109.769 in August, a month over month inflation rate that's statistically 0.002%, which BEA reports as an increase of “less than 0.1 percent”, which followed the PCE price index increase of 0.1 percent in July. Since the inflation adjustment to PCE is effectively zero, that leaves real PCE up more than 0.4%, after a revised 0.3% increase in July.  Note that when those price indexes are applied to a given month's annualized PCE, it yields that month's annualized real PCE in our familiar chained 2009 dollars, which are the means that the BEA uses to compare one month's or one quarter's real goods and services produced to another.  That result is shown in table 7 of the PDF, where August's chained dollar consumption total works out to 11,286.6 billion annually, 0.4% more than July's 11,237.1 billion...

However, in estimating the impact of the change in PCE on change in GDP, the month over month change doesn't buy us much, since GDP is reported quarterly.  Thus we have to compare real PCE from July and August to the the real PCE of the 3 months of the second quarter.  While this report shows those amounts monthly, the BEA also provides the annualized chained dollar PCE for those three months in the GDP report, as revised last Friday.  In table 3 of the pdf for the 2nd quarter GDP report, we see that the annualized real PCE for the 2nd quarter was represented by 11,178.9 million in chained 2009 dollars.  By averaging the annualized chained 2009 dollar figures for July and August,  11,237.1 billion and 11,286.6 billion, we get an equivalent annualized PCE for the two months of the 3rd quarter that we have so far.  When we compare that average to the 2nd quarter real PCE, we find that 3rd quarter real PCE has grown at a 3.0% annual rate for the two months we do have (note the math to get that annual rate:  (((11,237.1 + 11,286.6 ) / 2) / 11,178.9 ) ^ 4 = 1.03001)...this means that even if September real PCE does not improve from the average of July and August, growth in PCE would still add 2.03 percentage points to the growth rate of the 3rd quarter..

Real disposable personal income, or the purchasing power of disposable income, is arrived at in the same manner as we found real PCE; disposable personal income figures are adjusted for inflation using the PCE price index. However, even though that index was effectively unchanged in August, disposable personal income was only shown as up 0.4% by virtue of upward rounding from a 0.352% increase.  Hence, in a statistical oddity, when the 0.002% increase in the PCE index was applied to that, it reduced real disposable personal income to a rounded increase of 0.3%, following a 0.4% increase in July.  Our FRED graph below shows monthly real disposable personal income in blue and real personal consumption expenditures in red since January 2000, with the annualized scale in chained 2009 dollars for both shown in the current data box and on the lower left.  Also shown on this same graph in green is the monthly personal savings rate over the same period, with the scale of savings as a percentage of disposable income on the right.  The spike in income and savings at the end of 2012 was mostly the result of income manipulation before the year end fiscal cliff; the earlier spikes were as a result of the tax rebates enacted as a fiscal stimulus under George Bush.

August 2015 income and outlays

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PCE price index, Fed

That's going to grab the Fed's attention. That's amazingly low. Without food and energy it increased 0.1% and that is very low. They already delayed due to deflation worries and global events, this is just going to add to the delay on any rate increase.

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FRED: Employed full time

A little too wonkish for me but, do earnings in the top quintile skew these numbers — just like "average" wages and "median" wages?

Median usual weekly real earnings: Wage and salary workers: 16 years and over

Social Security Wage Statistics

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income from all sources

the metric tracked here is quite a bit different than the labor department stats, in that it's part of the nation income and product accounts data, and that it considers income from all sources...for instance, wages and salaries were just $7,831.1 billion of the $15,403.8 annualized national income rate for August...other contributors to this national personal income total include interest and dividends, transfer payments like unemployment comp & social security, proprietors' income, rental income, etc...since there's only one aggregage figure, there's no median or average...

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