November Personal Spending Up 0.6%, Two Months PCE Adds 171 Basis Points to Q4 GDP

The November report on Personal Income and Outlays from the Bureau of Economic Analysis includes the month's data for our personal consumption expenditures (PCE), which accounts for more than 69% of the month's GDP, and with it 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.  In addition, this release also reports our personal income data, disposable personal income, which is income after taxes, and our monthly savings rate.  Because this report feeds in to GDP and other national accounts data, the dollar value change reported for each of those metrics is not the current monthly change; rather, they're all seasonally adjusted amounts at an annual rate, ie, they tell us how much income and spending would increase if November’s adjusted income and spending were extrapolated over an entire year.  However, the percentage changes are computed monthly, from one month's 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 October to November.

Hence, when the opening line of the press release for this report tell us "Personal income increased $54.0 billion (0.3 percent) in November", they mean that the annualized figure for seasonally adjusted personal income in November, $16,629.1 billion, was $54.0 billion higher, or more than 0.3% higher than the annualized personal income figure of $16,575.1 billion extrapolated for October; the actual, unadjusted change in personal income from October to November is not given.  At the same time, annualized disposable personal income, which is income after taxes, also rose by more than 0.3%, from an annual rate of $14,515.6 billion in October to an annual rate of $14,566.5 billion in November.  These figures were arrived at after personal income for October was revised up from $16,574.6 billion annually and October's disposable personal income was revised up from $14,513.3 billion annually.  The monthly contributors to the change in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also annualized.  In November, the largest contributors to the $54.0 billion annual rate of increase in personal income were a $34.3 billion increase in wages and salaries and a $11.4 billion increase in dividend and interest income.

For the personal consumption expenditures (PCE) that we're interested in, BEA reports that they increased at a $87.1 billion rate, or at a rate greater than 0.6%, as the annual rate of PCE rose from $13,548.7 billion in October to $13,635.8 billion in November.  At the same time, October PCE was revised lower, from $13,557.4 billion annually to $13,548.7 billion. Total personal outlays, which includes interest payments and personal transfer payments in addition to PCE, rose by an annualized $91.7 billion to $14,140.3 billion annually in November, which left total personal savings, which is disposable personal income less total outlays, at a $426.2 billion annual rate in November, down from the revised $466.9 billion in annualized personal savings in October.  As a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to a post recession low of 2.9% in November, from the October savings rate of 3.2%.

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.  The BEA does that by computing a price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, and which is included in Table 9 in the pdf for this report.  That index rose from 113.242 in October to 113.504 in November, a month over month inflation rate that's statistically 0.02314%, which BEA reports as a 0.2% increase, following the 0.1% PCE price index increase they reported for October.  Applying the actual November inflation adjustment to the nominal amount of spending left real PCE up 0.4% in November, after October's real PCE was statistically unchanged.  Notice that when those price indexes are applied to a given month's annualized PCE in current dollars, it yields that month's annualized real PCE in those 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. Those results are shown in table 7 of the PDF, where we see that November's chained dollar consumption total works out to 12,014.2 billion annually in 2009 dollars, 4.014% more than October's 11,965.1 billion, a difference that the BEA rounds down and reports as +0.4%.

However, to estimate the impact of the change in PCE on the change in GDP,  the month over month changes don't help us much, since GDP is reported quarterly.  Thus we have to compare October's and November's real PCE to the the real PCE of the 3 months of the third quarter. While this report shows PCE for all those amounts monthly, the BEA also provides the annualized chained dollar PCE for those three months in table 8 in the pdf for this report, where we find that the annualized real PCE for the 3rd quarter was represented by 11,916.6 billion in chained 2009 dollars...(ie, that's the same as what's shown in table 3 of the pdf for the revised 3rd quarter GDP report).  Next, by averaging the annualized chained 2009 dollar figures for October and November, 11,965.1 billion and 12,014.2 billion, we get an equivalent annualized PCE for the two months of the 4th quarter that we have data for so far.  Then, when we compare that average of 11,989.65 to the 3rd quarter real PCE of 11,916.6, we find that 4th quarter real PCE has grown at a 2.47% annual rate for the two months of the 3rd quarter we have so far...(notice the math we used to get that annual growth rate: [ (((12,014.2 + 11,965.1) / 2) / 11,916.6) ^4 = 1.02474681 ].  That's a pace that would add 1.71 percentage points to the GDP growth rate of the 4th quarter by itself, even if there is no improvement in December PCE from that average.


(Note: the above was excerpted from my weekly economic synopsis at Marketwatch 666)

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