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May’s Personal Income Down 2.0%, Spending Unchanged

Summary:
2 Months PCE Would Add 7.36 Percentage Points to Q2 GDP Angry Bear Commenter RJS and Marketwatch 666 blogger computes the impact of real PCE from this report on GDP and explains his math. The May report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for nearly 70% of GDP, and the PCE price index, the inflation gauge the Fed targets, and which is used to adjust that personal spending data for inflation to give us the relative change in the output of goods and services that our spending indicated . . . this report also gives us monthly personal income data,

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2 Months PCE Would Add 7.36 Percentage Points to Q2 GDP

Angry Bear Commenter RJS and Marketwatch 666 blogger computes the impact of real PCE from this report on GDP and explains his math.

The May report Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for nearly 70% of GDP, and the PCE price index, the inflation gauge the Fed targets, and which is used to adjust that personal spending data for inflation to give us the relative change in the output of goods and services that our spending indicated . . . this report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate. Because this report feeds in to GDP and other national accounts data, the change reported for each of those metrics is not the current monthly change; rather, they’re seasonally adjusted amounts expressed at an annual rate, ie, they tell us how much national income and spending would change over a year if May’s change in seasonally adjusted income and spending were extrapolated over an entire year, The percentage changes are computed monthly, from one month’s annualized figure to the next, and in this case of this month’s report they give us the percentage change in each annualized metric from April to May.

Thus, when the opening line of the news release for this report tells us

Personal income decreased $414.3 billion (2.0 percent) in May“,

they mean that the annualized figure for seasonally adjusted personal income in May, $20,804.2 billion, was $414.3 billion, or 2.0% less than the annualized  personal income figure of $21,218.5 billion for April.

The actual, unadjusted change in personal income from April to May is not given . . . similarly, annualized disposable personal income, which is income after taxes, fell by more than 2.3%, from an annual rate of an annual rate of $18,855.4 billion in April to an annual rate of $18,419.1 billion in May. The reasons for the annualized $414.3 billion decrease in personal income can be viewed in the Full Release & Tables (PDF) for this release. Also as annualized amounts, and primarily reflected a $562.3 billion decrease in government social benefits, continuing the reversal of March’s $3,994.2 billion increase when the government stimulus checks went out, and which more than offset a $77.8 billion increase in wages and salaries, a $51.5 billion increase in farm and small business proprietor’s income, and a $11.3 billion increase in interest and dividend income…again, those are all annualized figures…

For the personal consumption expenditures (PCE) that we’re interested in, BEA reports that they increased at a statistically insignificant $2.9 billion annual rate, as the annual rate of PCE rose from $15,656.4 billion in April to $15,659.3 billion in May…that was after the April PCE figure was revised up from the originally reported $15,560.3 billion annually and March PCE was revised from an annual rate of $15,480.1 billion to an annual rate of $15,515.3 billion, a revision that was already captured by the 3rd estimate of 1st quarter GDP we reported on earlier….the current dollar increase in May spending reflected a $74.3 billion or 0.7% increase to $10,190.2 billion in annualized spending for services, which was mostly offset by a $71.4 billion or 1.3% decrease to an annualized $5,469.1 billion in spending for goods ….total personal outlays in May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $5.5 billion to a $16,127.7 billion annual rate, which left national personal savings, which is disposable personal income less total personal outlays, at a $2,291.4 billion annual rate in May, down from the revised $2,733.2 billion annualized personal savings in April…as a result of that decrease, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 12.4% in May, after April’s savings rate was revised from 14.9% to 14.5%…

As you know, before those personal consumption expenditures are used in the GDP computation, they must first be adjusted for inflation to give us the real change in consumption, and hence the real change in goods and services that were produced for that consumption….that’s done with the price index for personal consumption expenditures, which is a chained price index based on 2012 prices = 100, which is computed by the BEA and included in Table 9 in the pdf for this report….that index rose from 114.119 in April to 114.631 in May, a month over month inflation rate that’s statistically 0.44865%, which BEA reports as an increase of 0.4 percent, following a similarly rounded PCE price index increase of 0.6% reported for April…applying that May inflation adjustment to the nominal amounts of spending left the reported change in real PCE at -0.4% in May, after a real PCE increase of 0.3% in April and a real PCE increase of 4.4% in March….note that when those PCE price indexes are applied to each month’s annualized PCE in current dollars, it yields that month’s annualized real PCE in those familiar chained 2012 dollars, which are the means that the BEA uses to compare one month’s or one quarter’s real goods and services produced to another….those results are shown in table 7 of the PDF, where we see that May’s chained dollar consumption total works out to 13,662.1 billion annually, 0.42854% less than April’s 13,720.9 billion, a difference that the BEA reports as – 0.4%, even as the full decimal fractions are used in all their computations…

However, to estimate the impact of the change in PCE on the change in GDP, such month over month changes don’t help us much, since GDP is reported quarterly…thus we have to compare April and May’s real PCE to the the real PCE of the 3 months of the first quarter….while this report shows PCE for each of those amounts on a monthly basis, the BEA also provides the annualized chained dollar PCE for those three months in table 8 in the pdf for this report, where we find that the annualized real PCE for the 1st quarter was represented by 13,353.3 billion in chained 2012 dollars..(note that’s the same as is shown in table 3 of the pdf for the revised 1st quarter GDP report)….then, by averaging the annualized chained 2012 dollar figures for April and May, 13,720.9 billion and 13,662.1 billion respectively, we can get an equivalent annualized PCE for the two months of the 2nd quarter that we have data for so far….when we compare that average of 13,691.5 billion to the 1st quarter real PCE 2012 dollar representation of 13,353.3 billion, we find that 2nd quarter real PCE has risen at a 10.52% annual rate for the two months of the 2nd quarter that we have data for at this point…(note the math used to get that annual growth rate: (((13,662.1 + 13,720.9) /2) / 13,353.3 ) ^ 4 = 1.10522)….that’s a pace that would add 7.36 percentage points to the growth rate of the 2nd quarter by itself, with that computation based on the unlikely assumption that there’d be no change in June PCE from the April-May average…

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