Monday, March 29, 2010

February Personal Income Flat, Spending Increases

by Calculated Risk on 3/29/2010 08:30:00 AM

From the BEA: Personal Income and Outlays, January 2010

Personal income increased $1.2 billion, or less than 0.1 percent ... Personal consumption expenditures (PCE) increased $34.7 billion, or 0.3 percent.
Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in February, compared with an increase of 0.2 percent in January.
Personal saving -- DPI less personal outlays -- was $340.0 billion in February, compared with $374.9 billion in January. Personal saving as a percentage of disposable personal income was 3.1 percent in February, compared with 3.4 percent in January.
Stagnant income and increased spending means the saving rate declined again ...

Personal Saving rateClick on graph for large image.

This graph shows the saving rate starting in 1959 (using a three month trailing average for smoothing) through the February Personal Income report. The saving rate fell to 3.1% in February.

I still expect the saving rate to rise over the next couple of years - possibly to 8% or more - slowing the growth in PCE.

The following graph shows real Personal Consumption Expenditures (PCE) through February (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures The quarterly change in PCE is based on the change from the average in one quarter, compared to the average of the preceding quarter.

The colored rectangles show the quarters, and the blue bars are the real monthly PCE.

The increase in PCE in February was fairly strong (a 3.0% annual rate over the last three months). Using the Two Month average method, this suggests PCE growth in Q1 2010 will be around 3.0%. That will be the highest growth rate since Q1 2007, however this is being driven by less saving and transfer payments - not growth in income.

The National Bureau of Economic Research (NBER) uses several measures to determine if the economy is in recession. One of the measures is real personal income less transfer payments (see NBER memo). This declined in February to $9,006.4 billion (SAAR) from $9,020.2 billion in January, and is barely above the low of September 2009 ($9,000 billion).

non-business bankruptcy filings This graph shows real personal income less transfer payments since 1969.

This measure of economic activity is moving sideways - similar to what happened following the 2001 recession.

To sum it up:
  • Incomes were stagnant in February.
  • Spending increased as the saving rate declined.
  • PCE in Q1 2010 is on track for about 3.0% annualized growth, the fastest pace since Q1 2007
  • Real personal income less transfer payments is not increasing.

    This is a decent report for PCE, but PCE growth is not sustainable without income growth.