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Personal Income and Outlays: An Overview on Reading it


This report is put out by the Bureau of Economic Analysis, a Division of the Department of Commerce, about a month after the end of the month on which it is reporting. Thus, it reports three times as frequently as the PPI and CPI. As its name implies, it reports on most of the nation’s income and expenditures.

Here is the June 25, 2015 report for the previous May as it was seen by most in the trade:

PCE

Proir

Prior Revised

Consensus

Cons. Range

Actual

Personal Income - M/M change

0.4 %

0.5 %

0.4 %

0.3 % to 0.6 %

0.5 %

Consumer Spending - M/M change

0.0 %

0.1 %

0.7 %

0.6 % to 0.9 %

0.9 %

PCE Price Index -- M/M change

0.0 %

0.0 %

0.3 %

0.2 % to 0.5 %

0.3 %

Core PCE price index - M/M change

0.1 %

0.1 %

0.1 %

0.0 % to 0.2 %

0.1 %

PCE Price Index -- Y/Y change

0.1 %

0.2 %

 

   

0.2 %

Core PCE price index - Yr/Yr change

1.2 %

1.3 %

   

   

1.2 %


Market observers have made much of the fact that consumer spending rose 0.9% from the previous month, the biggest month on month increase since 2009. Consumers’ incomes also grew 0.5%, well above average pace, during this period. Some mentioned that the 0.3% month on month increase in the PCE price increase was “a little hot,” but in general it was no cause for alarm largely because the year on year figure was 0.2%, which is very low.

Core PCE prices, those without food and energy, were up 1.2. This is important because core prices are the figures that the Fed most likes to emphasize. And, given the Fed’s agenda to increase prices a bit and avoid deflation, core prices are a probably little lower than the Fed would like to see before raising rates.

This report does break down the details of national income and expenditures to some extent, but not nearly so much as many other economic reports such as GDP, CPI, and EIA energy reports.

There are in fact a number of important, leading economic figures that are not part of the skeletal headlines above, but perhaps should be. The BEA generates a “Disposable Personal Income” figure, which increased $65.5 billion, or 0.5% M/M. This figure is basically personal income minus taxes. These DPI figures are strong and probably bullish on a flow-of-funds analysis.

Also contained in the BEA report are figures for DPI and PCE expenditures in “chained-type price index” dollars. The Fed has frequently referred to this type of figure as the “chain-type Price Index for personal consumption expenditures” since it declared in February of 2000 that this output would be its primary measure of inflation.

This measure of inflation captures to a great extent the changes in both prices and quantities that consumers actually pay. It also accounts for the fact that as certain goods and services become more expensive, fewer of those and more of the less expensive items are bought.

This in turn explains why chained figures are lower than unchained ones. The chained or “deflator” PCE number for the June report was 0.6%, or 0.3% less than the conventional PCE number.

The release of this report stimulated the ongoing debate about whether it was the Fed’s focus on these PCE numbers which have been generally sluggish this year that has caused them to delay the upcoming cycle of interest rate increases. This seems unlikely. Even if the current Fed were to become a bit more dovish, there does not seem to be any open and shut case for raising rates immediately.

Also, if the Fed were to focus on the CPI, their perspective would be little different: the core Y/Y CPI figure was only 1.7% vs. core PCE at 1.2%. No, Ms. Yellen is delaying these hikes because she wants to avoid sending the U.S. into a deeper downturn such as those suffered by the U.S. in 1937 and Japan more recently.

Consider what she said in a speech that she gave at the Commonwealth club in San Francisco in 2009:

         If anything, I’m more concerned that we will be tempted to tighten policy too soon, thereby aborting recovery. That’s just what happened in 1936 when, following two years of robust recovery, the Fed tightened policy because it was worried about large quantities of excess reserves in the banking system. The result?  In 1937, the economy plunged back into a deep recession. 9 Japan too learned that hard lesson in the 1990s, when both monetary and fiscal policies were tightened in the mistaken belief that the economy was rebounding.

These episodes teach us a valuable lesson that we should heed in the present situation.  Let this not be another 1937, but a time when policymakers have the wisdom and patience to nurse the economy back to health. And, when the economy does come back, let it be built on a foundation of sound private investment and sustainable public policies.  Only then can we be confident that we can escape destructive boom-and-bust cycles and build a more permanent prosperity.

She frequently reminds us that deflation is much more to be feared than inflation because deflation is more difficult to come back from. And she sees a little bit of inflation as a kind of protective buffer zone against deflation.

When she talks about a “2% inflation target,” she is aiming at that target from the downside as well as the upside. For her and the Fed, the 0.2% Y/Y PCE Index figure might be too slender a buffer zone.

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