Wednesday, 20 of June of 2018

Economics. Explained.  

Personal Income and Consumption Expenditures — Monthly

June 10, 2018

Personal consumption expenditures jumped 0.6% in April after having risen 0.5% in March. Over the past year they have risen a solid 4.7%.    What we are really interested in is consumption spending in real terms (i.e., after adjustment for inflation) because that is what goes into GDP.    On that basis consumption spending rose 0.4% in April after having risen 0.5% in March.  Real consumer spending has risen 2.7% in the past year.  Because consumer spending is so volatile on a month-to-month basis, we find it helpful to look at a 3-month moving average which is what is shown above (in blue).  That 3-month increase in real PCE is now 1.2% versus 2.7% in the  past year but that is largely because of bad weather in January and February.

Consumers feel great.  And why not? The stock market is doing well and has re-gained much of what was lost during the correction.  It should continue to trend upwards as the year progresses and hit yet another record high level.  Jobs creation is robust which is bolstering income, gasoline prices remain relatively low, consumers have little debt, rates will stay low for some time to come even if the Fed very gradually raises short-term interest rates, and consumers are benefiting from the cut in individual tax rates.

Personal income rose 0.3% in April after having climbed 0.2% in March.  During the past year personal income has risen 3.8%.

Disposable income rose 0.4% in April after having risen 0.2% in March.  As a result real disposable income, which is what is left after inflation and taxes, has risen 1.9% in the past year.

Real disposable income per capita is generally regarded as the best measure of our standard of living.  It is currently rising at a 1.2% pace which is  slightly below its 1.6% average increase in the past 25 years.  It should reach a 2.0% year-over-year increase by late summer.

People seem to have an impression that hourly wages are stagnant.  That is inaccurate.  They grew fairly slowly at about a 2.0% pace for a while, but hourly earnings have been steadily accelerating and are currently rising at about a 2.7% pace but it bounces around from month to month.  Furthermore, as workers retire a very high wage-earning worker is replaced by someone who earns considerably less, which biases average  hourly earnings downward.  The Atlanta Fed has a series which presumably eliminates this downward bias.  It is rising at a solid 3.2% pace.  The bottom line is that, income is growing at a respectable pace.  If hourly earnings continue to climb, personal income will grow faster as well.

The savings rate fell 0.2% in April to 2.8%.  It issignificantly below its long-term average of 5.5%.  The consumer is feeling good and is willing to save less than he or she has thus far in this business cycle.  It is important to note that consumers are not dis-saving or outspending their income.  The drop in the savings rate does not necessarily mean that consumers now need to slow their pace of spending.  Note how the savings rate fell sharply below its long-term average of 5.5% back in 2005.  It stayed low for another three years until the recession began in December 2007.  Also, keep in mind that the impressive increase in the stock market and rising home prices have boosted assets, and consumer assets in relation to debt is the lowest since the early 2000’s.  Thus, the consumer is willing to save a bit less than in the past.

Stephen Slifer


Charleston, SC

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