Personal Income and Outlays

By Ryan Barnes

Release Date:	4-5 weeks after month's end
Release Time:	8:30am Eastern Standard Time
Coverage:	Previous month
Released By:	Bureau of Economic Analysis (BEA)
Latest Release:	http://bea.gov/bea/newsrel/pinewsrelease.htm

Background
The Personal Income and Outlays Report (sometimes called the Personal Consumption Report) is issued by the Bureau of Economic Analysis (BEA) monthly. The report contains two sections, which together provide insight into consumer behavior and total economic consumption. The first section deals with personal income, while the other deals with personal outlays.

Personal income is a measure of income received from wages and salaries, dividends and interest, rental income, and the like. All are measured in actual dollars and usually expressed in percentage terms. Wages and salaries are the dominant contributor to the aggregate total.

Personal outlays is made up of mostly personal consumption on goods and services, but also includes interest payments made on non-mortgage debt and transfer payments to government or social services.

From these two basic variables a bit of math is done to derive:

• Real Personal Income: Personal income per capita (using population figures), and adjusted for inflation
• Disposable Personal Income (DPI): Personal income minus tax payments
• Personal Savings Rate: DPI minus personal outlays (and expressed as a percentage of DPI)

Personal consumption expenditures (PCE) deal with the other side of the consumer equation, mainly how much people are spending. PCE counts consumer spending for things such as retail items, but also how much people are spending on credit card interest payments. PCE measures also deduct the dollars spent by consumers on things like social security withholding and pension payments made by the self-employed.

PCE data is also expressed as a chain-weighted index. This means that results from each period are linked to others to produce an index level that takes into account such behavior as substitution of goods when prices rise. The PCE Index is a large component of the Conference Board's Index of Coincident Indicators,and is also used to calculate real gross domestic product (GDP).

Each release will show results for each month in the year-to-date, as well as annually for the previous three years. Personal income is broken down by general sector (manufacturing, services, government, etc), while personal consumption is divided among durables, non-durables and services.

What it Means for Investors
Personal income figures have shown to be the biggest determinant of future consumer demand. If people have more disposable income, they will generally spend more money. If this is not the case, an increase in the savings rate will occur. The U.S. has shown very low savings rates for many years now, even showing a slightly negative rate in recent years.

The Fed has also anointed the core PCE Index (with food and energy removed) as one of its favorite inflation indicators, some preferring it to even the Consumer Price Index (CPI). However, because the CPI will be released prior to this report, there is rarely much overall surprise and, therefore, little market reaction to the PCE index.

One important thing that is excluded from the personal income figures are capital gains, as from the sale of appreciated stock. In the past decade, there has been a lot of wealth created in the stock market for many investors. While there are no official measurements of it, capital gains represent a source of disposable income for many and, as such, the personal income figures are known to be incomplete.

Strengths

• The chain-weighted PCE Index is considered a valuable longer term price indicator.
• PCE represents the largest portion of GDP.
• Savings rates highlight the potential future spending power of consumers.

Weaknesses:

• Released after many other indicators in the month, reducing its timeliness
• Not all sources of consumer income are included
• No extensive industry or demographic breakdowns

The Closing Line
The Personal Consumption Report is most useful as a predictor of overall consumer demand and the ability for people to spend more in the future through higher levels of disposable income. PCE represents the largest component of real gross domestic product.

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