Monday, August 4, 2008

August 4, 2008: Annual personal income growth strong, but risks remain

Personal Income and Consumption Expenditures (June)
Personal Income (PI)
Expectations: -0.1% since May
Previous (April): +1.8%
Today’s release (May): +0.1%

Personal Consumption Expenditures (PCE)
Expectations: +0.5%% since May
Previous (April): +0.8%
Today’s release (May): +0.6%

Core PCE Deflator
Expectations: +0.2%% since May
Previous (April): +0.1%
Today’s release (May): +0.3%

A renewed angst in the markets prevailed following the June report. Since May, personal income and personal consumption expenditures rose 0.1% and 0.6% in current dollars, while disposable personal income (DPI), which is income minus taxes, fell -1.9%. This is another good-bad report, where the bad is mostly on the price (inflation) side.

Most of the monthly rise in income and consumption was due to price increases. We know this because real PDI and real PCE – “real” numbers extract the rise from prices - fell by -2.6% and -0.2% since May. The PCE deflator (the amount that consumption prices rose) rose 0.8% since May. The core PCE deflator, which takes out the increase of energy and food prices, rose 0.3% since May. Prices outside of food and energy are accelerating slightly.

A closer look

The reduction of DPI was due to the Economic Stimulus Act of 2008 since the rebates checks are counted as a reduction in taxes. DPI = Income – Taxes, and the rebates lower the term “Taxes,” so DPI from May to June would be negative since there were more rebate checks sent out in May than in June (“Taxes” higher in June than in May).

Real PDI and Real PCE took a significant hit on a monthly basis; again, this is mostly due to the transitory effects of the stimulus checks. However, since last year real PDI and real PCE grew 3.4% and 1.2%; this is a positive, and is the intended effect of the stimulus. For now, income numbers look good on an annual basis.

Going forward, there are two risks. First, the strength in real PDI is expected to wear off as the stimulus checks stop in July, and drag consumption with it. A true test of consumer resilience will occur in the fourth quarter of this year (October through December). Second, consumer saving has risen substantially with the influx of stimulus income. Personal saving in May was 4.9% and 2.5% in June, which are substantially higher relative to the non-stimulus month of April, when personal saving was just 0.3%. If saving remains high, then consumption will fall, and with it, Gross Domestic Product (GDP). At 70% of total measured GDP, a reduction in consumer spending falters, economic growth could fall substantially.

Notes on revisions

This data is subject to annual revisions that are reported in July. 2005 and 2007 were revised down, while 2005 was revised up. This information was already embedded in last week’s GDP report.

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