May Personal Income up 0.4%, Spending up 0.1%; 2 Months PCE to Add 184 Basis Points to Q2 GDP

The May report on Personal Income and Outlays, released on Friday by the Bureau of Economic Analysis, gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for more than 69% 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 same report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate.  However, because this report feeds in to GDP and other national accounts data, the change reported for each of those are not the current monthly change; rather, they're seasonally adjusted amounts at an annual rate, ie, they tell us how much income and spending would increase for a year if May's adjusted income and spending were extrapolated over an entire year. Nonetheless, 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 April to May.

Thus, when the opening line of the press release for this report tell us "Personal income increased $67.1 billion (0.4 percent) in May", they mean that the annualized figure for seasonally adjusted personal income in May, $16,487.9 billion, was $67.1 billion, or a bit more than 0.4% greater than the annualized  personal income figure of $16,420.8 billion for April; the actual, unadjusted change in personal income for April to May is not given.   Similarly, annualized disposable personal income, which is income after taxes, rose by nearly 0.5%, from an annual rate of an annual rate of $14,418.4 billion in April to an annual rate of $14,490.1 billion in May.  The contributors to the increase in personal income and disposable personal income can be viewed in table 1 of the Full Release & Tables (pdf) for this release, also as annualized amounts, and were led by a $39.8 billion increase to $2,345.6 billion annually in interest and dividend income, while wages and salaries rose by just $6.6 billion annually to $8,383.9 billion in May.

For the personal consumption expenditures (PCE) that we're most interested in, BEA reports that they increased at a $7.3 billion annual rate, or by less than 0.1 percent, as the annual rate of PCE rose from $13,206.7 billion in April to $13,214.0 in May.  That happened as the April PCE figure was revised up from the originally reported $13,108.4 billion annually and March PCE was revised up from $13,008.9 billion to $13,157.5 billion, a change that was already captured by the 3rd estimate of 1st quarter GDP we reported on earlier.   The current dollar increase in May spending resulted from a $27.1 billion increase to $8,988.5 billion in annualized spending for services, which was offset by $19.8 billion annualized decrease to an annualized $4,225.5 billion annualized in spending for goods.  Total personal outlays for May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $9.8 billion to $13,699.1 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $791.0 billion annual rate in May, up from the revised $728.8 billion annualized personal savings in April.  As a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, rose to 5.5% in May from April's savings rate of 5.1%.

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 achieves 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 fell from 112.198 in April to 112.127 in May, a month over month deflation rate that's statistically -0.0633%, which BEA reports as an decrease of 0.1 percent, following the PCE price index increase of 0.2% they reported for April.   Applying that inflation adjustment to the nominal amounts of spending left reported real PCE up 0.1% in May, after an April real PCE increase of 0.2%.   When those PCE price indexes are applied to each month's annualized PCE in current dollars, 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 we see that May's chained dollar consumption total works out to 11,785.0 billion annually, 0.1189% more than April's 11,771.0 billion, a difference that the BEA reports as 0.1%, even as full fractions are used in all their computations.

However, to estimate the impact of the change in PCE on the change in GDP, such month over month changes don't help us much, since GDP is reported quarterly...thus we have to compare April and May's real PCE to the the real PCE of the 3 months of the first 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 1st quarter was represented by 11,701.3 billion in chained 2009 dollars (note that's the same as is shown in table 3 of the pdf for the revised 1st quarter GDP report).  Then, by averaging the annualized chained 2009 dollar figures for April and May, 11,771.0 billion and 11,785.0  billion respectively, we can get an equivalent annualized PCE for the two months of the 2nd quarter that we have data for so far.  When we compare that 2 month average of 11,778.0 to the 1st quarter real PCE of 11,701.3, we find that 2nd quarter real PCE has grown at a 2.65% annual rate for the two months of the 2nd quarter we have data for.  (Note the math that’s used to get that annual rate: (((11,785.0  + 11,771.0)/ 2)/11,701.3) ^ 4 = 1.02648.  That's a pace that would add 1.84 percentage points to the growth rate of the 2nd quarter by itself, even if there is no improvement in June PCE from that average.


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

Subject Meta: 

Forum Categories: