Personal Income and Spending

What is it: The one and only Personal Income and Spending report. It records the income of Americans, how much they spend and what they save

Link to most recent release: HERE (press on Current release -> Related Materials -> Full Release and Tables)

Release time: 08:30 am, data is made public four weeks after the end of the reported month

Frequency: Monthly

Source: Bureau of Economic Analysis (BEA) ,Department of Commerce

Revisions: Generally modest. Revisions come with following releases.

Why is it important

Consumers are the rulers of the economy and their spending amounts to the largest part of the Gross Domestic Product (aka GDP, aka the country's revenue). As consumer expenditures are the main driving force of sales, imports, factory output, business investments and job growth this report gives a good picture of people's view on the economy as well as where they stand on the fear/greed economic gauge. In order to spend consumers need to earn and this reports shows figures on both sides of the story.

Personal Income is separated as follows:

• Wages and Salaries - largest contributor representing 51% of all income

• Proprietors' income - self-employed people

• Rental Income - earnings from renting/leasing real estate

• Dividend Income - from stocks

• Interest Income - from interest bearing securities - bonds, deposits

• Transfer Payments - social security, unemployment benefit, food stamps

• Other labor income - life insurance, health plans, pensions

Persona Consumption Expenditures - on average Americans spend 95% of all their income. Three categories included: durable goods(10%-15% of all), nondurable goods(20%-25%) and services(around 65% - fastest growing)

Personal Savings - income minus expenditures = savings. Money ends in savings accounts, stocks, bonds, money market accounts. Personal savings rate  is the percentage of saved money as part of the total income.

Take the annualised amount of wages and salaries earned in a particular month and compare that with what consumers actually spent(PCE) for that same period. This tells us a story of how much people are going into their savings or borrowing to maintain their lifestyle.

How is it computed

Gathering data for the personal income report is a hellish statistical task. The Bureau of Economic Analysis, whose job it is to calculate personal income and spending, has to collect information from many sources in and out of government. For instance, numbers on wages and salaries come from the monthly employment report. Transfer payments, such as Social Security income, veterans' benefits, and unemployment insurance, are derived from the Social Security Administration, the Veterans Administration, and the Treasury and Labor Departments. Income from stock dividends is extrapolated from the U.S. Census Bureau, IRS records, and quarterly income statements filed by corporations.Interest income is based on Treasury publications as well as figures from the Federal Reserve's Flow of Funds. Money earned from self-employment and rental income has to be estimated from other government sources. All this is just to compute personal income!

For numbers on personal spending, the agency looks at retail sales data (excluding autos). The amount Americans spend on motor vehicles is based partly on reports from auto manufacturers. Expenditures on services are also complicated. Consumer spending on air travel comes from the Air Transport Association; healthcare outlays are based on the Labor Department's employment data. In some cases, such as payments for dental services and haircuts, the BEA's only recourse is to do a simple straight-line calculation that assumes an automatic increase for such outlays each month. This might not be the most precise measure of consumer expenditures, but the methodology is supported by years of testing and practice. In any event, the government eventually revises all these numbers as more complete data becomes available.

Both personal income and personal consumption expenditures are seasonally adjusted and are presented in both current dollars (which are not adjusted for inflation) and constant dollars (which remove the effects of inflation). The monthly figures are also annualised to show how they would perform should the trend continue for a while. As for the savings level, no fancy tricks here. It's strictly a residual number; savings is whatever remains after you subtract total consumer outlays from personal disposable income.

Highlights

Consumer spending is affected by what is called the "wealth effect". If people believe their assets(for example house and stocks) have a higher value as they would in  a booming labour market that will affect their spending regardless of their monthly income. Economists estimate that for every one dollar increase of one's stock portfolio he/she is going to spend an additional 3 to 6 cents. A 1 dollar increase in other types of wealth(real estate) raises sending by 2 to 4 cents. "Negative wealth" effect also exists.

The best measure of true consumer purchasing power is the disposable income. This number is, of course, not inflation adjusted so one should always subtract the inflation rate from it.

PCE(personal consumption expenditures) is arguably the most important figure in the entire report. As Total amount that individuals spend on durable and non-durable goods as well as services accounts for nearly 70% of GDP this number is closely monitored.

Interest paid by Persons which does not include mortgage and home equity loans is another important figure to keep an eye on. If above 2.5% of total disposable income it might signal tough times ahead.

Spending on durable goods begin to fall 6-12 months before the onset of a recession and they begin to pick up 1-2 months before the end of it.

Look at the trailing three month changes in real PCE which is an indicator how the GDP will do in the current quarter and beyond. 

PCE is normally lower than CPI by about 0.3 percent. CPI has has set products it tracks and does not account for changes in consumer buying habits. Consumers might switch to buying cheaper mean (beef->chicken). PCE price index allows for substitutions.

Market Impact

PCE price index is what the FED keeps an eye on and uses to determine how to act on the interest rates.

Bonds

If high PCE the FED will increase interest rates which will put pressure on bond prices

Stocks

High income and spending is a positive sign for the stock market as it indicates a strong economy.

Dollar

Higher interest rates lead to stronger dollar since foreign investors will prefer to hold T-bills.