Personal Income and SpendingPersonal Income and Spending

Published by: Bureau of Economics Published by: Bureau of Economics Analysis (BEA)Analysis (BEA)

Frequency: monthlyFrequency: monthly Period Covered: prior monthPeriod Covered: prior month Market significance: moderate to Market significance: moderate to

highhigh Web site: www.bea.govWeb site: www.bea.gov

What is the Personal Income and What is the Personal Income and Spending?Spending?

Records the income Records the income Americans receive, Americans receive, how much they how much they spend, and what spend, and what they savethey save

Personal Personal Consumption Consumption Expenditure (PCE) is Expenditure (PCE) is the largest the largest component of the component of the GDPGDP

25%

75%

Othercomponents

PCE

This report is broken into three main This report is broken into three main categories:categories:• Personal IncomePersonal Income• Personal SpendingPersonal Spending• Personal SavingsPersonal Savings

Personal Income Personal Income

Personal Income represents the Personal Income represents the money households receive before money households receive before taking out taxes.taking out taxes.

It is also known as Disposable It is also known as Disposable Personal Income (DPI)Personal Income (DPI)

Major sources of income Major sources of income • Wages and SalariesWages and Salaries 56%56%• Proprietors’ IncomeProprietors’ Income 8%8%• Rental IncomeRental Income 1.4%1.4%• Dividend IncomeDividend Income 4.4%4.4%• Interest IncomeInterest Income 11%11%• Transfer paymentsTransfer payments 13%13%• Other labor IncomeOther labor Income 6.2%6.2%

*Profits households receive from the sale of *Profits households receive from the sale of assets such as stock, bonds, or real state are assets such as stock, bonds, or real state are excluded from personal income.excluded from personal income.

Personal SpendingPersonal Spending

Formally known as:Formally known as:• Personal Consumption ExpendituresPersonal Consumption Expenditures

Personal Consumption Expenditures Personal Consumption Expenditures accounts for 2/3 of all economic accounts for 2/3 of all economic activity, because of this is that activity, because of this is that changes in PCE can lead to major changes in PCE can lead to major shifts in the business cycle.shifts in the business cycle.

Personal Consumption Expenditures Personal Consumption Expenditures include:include:• Durable GoodsDurable Goods 12-14%12-14%

Expensive items that usually last more than Expensive items that usually last more than 3 years3 years

• Non-durable GoodsNon-durable Goods 30%30% Items that last less than 3 years. Food, Items that last less than 3 years. Food,

clothing can be included here.clothing can be included here.

• ServicesServices 60%60% There has been a jump from 40%-60% in the There has been a jump from 40%-60% in the

past 40 years.past 40 years.

Personal SavingsPersonal Savings

What is left over after spending on goods, What is left over after spending on goods, services, and interest payments on credit services, and interest payments on credit cards and loans.cards and loans.

Money that usually ends up in savings Money that usually ends up in savings deposits, bank CD’s, money market deposits, bank CD’s, money market accounts, stocks, and bonds.accounts, stocks, and bonds.

Personal Savings Rate, the percentage of Personal Savings Rate, the percentage of disposable personal income that is saved.disposable personal income that is saved.• 1960’s1960’s above 8%above 8%• 2000’s2000’s below 3%below 3%

Importance of this IndicatorImportance of this Indicator

Consumers rule the economy.Consumers rule the economy. Consumer expenditures are the main Consumer expenditures are the main

driving force of sales, imports, driving force of sales, imports, factory output, business investments factory output, business investments and job growth in the US.and job growth in the US.

Besides inflation, personal Income Besides inflation, personal Income can have a great impact on when can have a great impact on when and how much consumers spend.and how much consumers spend.

Keys to Interpret this IndicatorKeys to Interpret this Indicator

Changes in household wealth play an Changes in household wealth play an important role in determining important role in determining consumer spending behaviorconsumer spending behavior• It is believed that for every dollar It is believed that for every dollar

increase in the value of one’s stock increase in the value of one’s stock portfolio, consumers spend an additional portfolio, consumers spend an additional 3-6 cents.3-6 cents.

Year-end wages and salary amounts Year-end wages and salary amounts can be distorted due to companies can be distorted due to companies that distribute bonuses.that distribute bonuses.

The increase of disposable personal The increase of disposable personal income in comparison to inflation.income in comparison to inflation.

Any change in in spending behavior has a Any change in in spending behavior has a notorious impact on the overall economynotorious impact on the overall economy

If interest payments exceed 2%-2.5% over If interest payments exceed 2%-2.5% over a prolonged period of time, it might a prolonged period of time, it might indicate that households are experiencing indicate that households are experiencing financial stress.financial stress.

Abrupt movements in the personal savings Abrupt movements in the personal savings rate can indicate a growing concern rate can indicate a growing concern among households over their financial among households over their financial future.future.

A sudden increase in the savings rate A sudden increase in the savings rate means that people are becoming means that people are becoming nervous about their income and job nervous about their income and job security, just as a sharp fall in the security, just as a sharp fall in the personal savings rate can be personal savings rate can be troubling as well.troubling as well.

Rising wages and job stability Rising wages and job stability stimulate orders for durable goods.stimulate orders for durable goods.• Orders for durable goods can be an Orders for durable goods can be an

important indicator of a recession 6-12 important indicator of a recession 6-12 months before or they can be the months before or they can be the turning point one or two months before turning point one or two months before a recession ends and recovery begins. a recession ends and recovery begins.

By looking at changes in PCE for By looking at changes in PCE for three-month period it is possible to three-month period it is possible to see how the GDP will do in the see how the GDP will do in the current quarter and beyond.current quarter and beyond.

Latest Release for March 2007Latest Release for March 2007

Data AnalysisData Analysis Based on the information from this Based on the information from this

indicator, we conclude:indicator, we conclude:• There is a slight increase in income that might There is a slight increase in income that might

lead to an increase on spending.lead to an increase on spending.• The negative change in PCE might mean that The negative change in PCE might mean that

something is ahead in the economy, it is something is ahead in the economy, it is recommended to pay attention to PCE in the recommended to pay attention to PCE in the following months.following months.

• Personal Saving Rate has declined in the past Personal Saving Rate has declined in the past months, it might be an indication that months, it might be an indication that households might have a concern about their households might have a concern about their financial future.financial future.

The economy seems to be at a stable The economy seems to be at a stable stage, however there are some signs that stage, however there are some signs that the economy might slow down.the economy might slow down.