Consumer Spending Continues Despite Slowing in Income Growth

Written by: John Landers

One of the best ways an individual can gain an understanding on the workings of the American economy is to look at statistical indicators such as the Personal Income and Outlays Report. Often call the Personal Consumption Report, the Bureau of Economic Analysis (BEA) releases data on the last business day of the month after taking the survey or the following business day.

The report comprises two sections and offers a glimpse into income changes, on a month-to-month basis and consumer consumption. The first portion of the survey deals with personal income. The other section provides insights into personal outlays or consumption, the types of goods and services where people spend their money and savings patterns.

Personal Income

The personal income (PI) component of the report provides information on income individuals receive from diverse sources.

PI includes the following items:

  • Wages and salaries
  • Rental income
  • Interests
  • Dividends

Data released by the BEA for February 2012 show personal income increased by $28.2 billion, 0.2% or. In January, personal income increased $26 billion, a percentage gain of 0.2. Disposable income (DI), which reflects personal income minus taxes, also increased to $18.9 billion in February. Real Disposable Income increased 0.1% in February and decreased by 0.2% in January.

Personal Outlays

Personal outlays include consumption, personal interest payments and personal transfer payments. Personal transfer payments include Make Work Pay Credits, Aid to Family with Dependent Children, social security business subsidies and other forms of government payments that do not add to the production output.

According to the Bureau of Economic Analysis, personal consumption   expenditures (PCE) increased 0.8 percent or $86 billion. This represents the strongest increase in consumer expenditures since August 2009. Real personal consumption expenditures increased 0.5% in February as compared to a 0.2% in January. The real PCE shows changes made to the PCE to eliminate price changes.

Consumer savings declined to 3.7% in February, down from 4.3 in January. Savings has not dropped below 4% since August 2009. The decrease in the savings rate may have a direct correlation with the increase in auto sales. Traditionally, consumers help  finance the purchase  of  new automobiles by borrowing money from their savings.

Disposable Personal Income Cause for Concern

Some analysts have concerns about the overall downward trend in disposable personal income for the past several months. The issue being that once this “pent up” demand  consumers have for new cars and other goods has been satiated, where will the money come from to sustain consumption levels.

Percentage Change of Disposable Personal Income Percent Change From Month One Year Ago

 

Data Source: Bureau of Economic Analysis/Chart: Primerates.com

 

Typically, the falling growth rate in personal income portends a decline in consumer spending. Ideally, the more money people make, the more they spend and save. Consumer spending has been instrumental in keeping the U.S. economy afloat. A pickup in the number of new jobs created could reduce the risk of the economy retreating from recent improvements.


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