"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Monday, January 31, 2011

Personal Income and Outlays

Today, we're getting a look at Personal Income and Outlays, which tracks several things: the rate of change in personal income, the rate of change in consumer spending, and the rate of change in the costs of a fixed basket of goods and services[1]. In November, Personal Income increased 0.3%, consumer spending increased 0.4%, and the core PCE price index increased 0.1%. Anticipating December, the analysts are looking for personal income to increase another 0.4%, consumer spending to increase 0.5%, and core PCE price index to increase only another 0.1%.
Now, what does the Bureau of Economic Analysis have to say about these predictions? First and foremost, personal income was up 0.4% (meeting expectations), consumer spending was up 0.7% (beating expectations) and core PCE price index increased less than 0.1% (also beating expectations). that in and of itself should market he markets happy, but let's drill down a little into the report.
First off, let's define a concept called "real income". Investopedia defines "real income" as "the income of an individual group after taking into consideration the effects of inflation on purchasing power. For example, if you received a 2% salary rise over the previous year and inflation was 1%, then your real income only rose 1%. Conversely, if you received a 2% raise in salary and inflation stood at 3%, then your real income would have shrunk 1%."
What does this have to do with the price of tea in China? Well, the BEA figures indicate that real disposable income increased only 0.1% in December (down from the 0.2% increase from November), and real consumer spending[2] was up 0.4% (up from November's 0.2%). The real disposable personal income and real personal consumption figures are indexed against the value of the dollar in 2005, so you can get a sense of how much the dollar has devalued itself just in the past 5 years..
The rate of personal savings (which is calculated as disposable personal income minus personal outlays, on the reasonable assumption that if you aren't spending the money you must be saving it in some fashion) increased to 5.2% of disposable personal income in December (down from November's 5.5%).
The PCE Price Index[3] increased 0.3% in December.
Durable goods purchases increased 1.0% in December (up from November's 0.2% decrease), nondurable goods purchases increased 0.3% (as compared to November's 0.3% increase).
In summation, then: despite my personal pessimism about "real" income and outlays vs. "current dollar" income and outlays, December was a solid month. The markets can (or, at least, should) look to this as a positive sign. Particularly for investors in durable goods manufacturers, because these also tend to be the big ticket high cost items.
[1] In the "don't get me started" category, this typically looks at a "core" fixed basket of goods and services. Highly volatile items are, as always, excluded.
[2] If you've pulled up the BEA report and are playing along with the home game, this is consumer spending is Personal Consumption Expenditures on the report. Anything labeled "Chained (2005) dollars" is what is considered "real" for these purpose
[3] Not the "core" PCE Price Index .

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