Personal Income and Spending: ‘ad usum proprium’.

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Core PCE and Personal Spending

Takeaways

+ What a surprise this report was, the recession of the inflation data was retiringly negative on a month over month basis. Per contra, the sequential print of Core PCE was reported higher.

To wit:Core PCE Inflation (FED’s favorite) for the quarter was reported lower by a tenth of a percent to +1.3% (Q/Q), nevertheless the sequential rate fell by a mere 1bp and of course, rounded up to +1.4% (or for those of you keeping track +1.354% unrounded).

Noting for greater context, however, that estimates of the Core PCE Index rose 0.11% (M/M) in November and ytd is up 1.51%. We can concieve thus, inflation bottomed in the August 1st of 2017, at which point Core PCE was reported at 1.5%

 

Table 1. Personal Income and Its Disposition (Months)

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Table 2. Personal Income and Its Disposition (Years and Quarters) (Not Shown)

Table 5. Personal Income and Its Disposition, Percent Change from Preceding Period

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Table 7. Real Personal Consumption Expenditures (PCE) by Major Type of Product

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Tables 9 and 11. Price Index for Personal Consumption Expenditures

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Personal Income and Spending

Market Sensitivity: High.

What Is It: Records the income Americans receive, how much they spend, and what they save.

Most Current News Release on the Internet: www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

Home Web Address: www.bea.gov

Release Time: 8:30 a.m. (ET); data is made public four weeks after the end of the reported month.

Frequency: Monthly.

Source: Bureau of Economic Analysis (BEA), Department of Commerce.

Revisions: After the initial release, data on income, spending, and savings undergo revisions for the next several months as more complete information comes in. The magnitude of the changes is usually modest. Annual revisions normally are done every summer (in July or August), and benchmark changes occur every four or five years to incorporate new data as well as changes in methodology.

Bernard Baumohl. The Secrets of Economic Indicators

 

Market Impact
Normally, an economic indicator that comes out as late in the month as this one does would not get much attention from the financial markets. Investors have already received some news on individual income and spending from the employment report and through the retail sales data. But one statistic in this report greatly preoccupies money managers and policymakers: the core PCE price index. The Federal Reserve has publicly stated that it wants to see this important inflation measure rise 1.75%–2.0% per year. A pace markedly above or below that range has very real implications for interest-rate policy.

Bonds

Fixed-income investors prefer to see listless growth in both income and spending. Any data that affirms sluggishness in the economy is expected to support higher bond prices and lower yields. On the flip side, accelerating gains in income and especially in personal consumption can agitate bond traders because it suggests more rapid economic growth ahead and possibly higher inflation. Such a scenario might eventually force the Federal Reserve to raise short-term interest rates. Thus, a larger-than-expected jump in household spending can induce a sell-off in the bond market, with the price of fixed incomes dropping and yields climbing.

Stocks

Investors in the equity market can be expected to react differently from their colleagues in bonds. Higher personal income and spending are viewed favorably in the stock market because they fuel more economic activity and fatten corporate profits. That’s a far better scenario than anemic income growth and weakening expenditures, which portend a struggling economy and soft profits.
Of course, there is an important caveat here. Stock investors will run from the markets if the data shows personal consumption surging when the economy is already operating at or close to maximum speed. This raises the prospect of accelerating inflation and higher interest rates, which are anathema to both stock and bond investors.

Dollar

Foreign exchange investors are likely to respond to the personal income and spending numbers. A healthy increase in both bodes well for the U.S. dollar. High consumer demand encourages more growth and puts upward pressure on interest rates. That makes the dollar more attractive to foreign investors, particularly if it results in a greater return on investment than other currencies. A weaker-than-expected report on consumer spending presages lower interest rates, and that’s often bearish for the dollar.

 

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-R.W.N II

 

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