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Economy in Brief


by Bob Brusca PCE Trends Steady Despite a Dip in Income Growth June 1, 2007

About the PCE report… We offer three exhibits to cover the key trends in the PCE report: a chart on PCE spending and income trends, a chart on the Core PCE trend and a table with the key data trends for these measures. The PCE report is a report with a lot of moving parts. It has the key and comprehensive data on consumer spending, both on goods and services, presented in the same framework which it feeds into GDP. It has the Fed’s preferred inflation measure, the Core PCE. And it contains various observations on wage and income growth, some inflation-adjusted and some not. So this is always a report with a number of components to keep an eye one. Its drawback? It lags topic trends by about one month.

Key events this month. This month, income actually declined (but only for the month) while extra strength in services spending more than made up for weak spending on goods. Meanwhile, the Fed’s key inflation measure, the Core PCE deflator, came into the ‘Feds’ (well some people at the Fed anyway…) comfort zone at 2% Yr/Yr. This is after being out of the zone for almost three years straight. I wonder if they’ll stage a ticker-tape parade for it on Broadway like did when John Glenn came back from his trip in outer space? No astronaut has been gone for THREE years.

Income and spending trends. Income and spending trends show that real spending and real disposable personal income (real DPI) are now trending on very similar growth planes. Income seems almost fully supporting spending but that is with the savings rate still hovering at a negative 1% to 1.3% or so. Still income and spending are on nearly identical flat trends around the 3.5% mark in real terms—not bad.

Home, home on the range…The PCE deflator is back at 2% after nearly three straight years above the top of the Fed’s comfort zone. It is pictured along with the Fed funds rate in the second chart. It’s still too soon to say if the price measure will stay inside. The pick up in the rest of the economy is a good reason for the Fed to remain cautious despite this near historic event. Columbus ‘discovers’ America? The PCE Core discovers its comfort zone?

Looking ahead to Q2 -- Current trends are looking solid for consumer spending and income. The savings rate is still negative but it has stabilized at that level. The far right column in the table below lets you see how we are doing in the new quarter. Overall real PCE is up at a 2.5% annual pace, not bad for two thirds of GDP. Durable goods and services spending are the main components driving consumer spending in Q2. Real DPI is up a 2.3% pace - So far so good.

Conclusion. The PCE report puts a solid spin on prospects for growth in Q2 and gives us a Core PCE deflator with no room to breathe but at least no reason to hold our breath. While the Fed will be happy with the PCE deflator inside its unofficial and publicly deniable comfort zone, the Fed is nonetheless looking at trends down the road. If the economy is on the mend, inflation will no longer be aided by an undercurrent of economic weakness. That is why this report still keeps the Fed on guard.

Consumer Spending And Income Trends:
Apr.07
Percentage Changes At Annualized Rates: Various Horizons
Inflation-adjusted 1-Mo:AR Three-Mos Six-Mos One Year Q2/Q1
Consumption 2.9% 2.3% 3.6% 3.5% 2.5%
  Goods -2.6% 0.4% 4.2% 3.5% 1.8% 
     Durable Goods 0.8% 1.9% 6.9% 5.1% 4.5%
     Nondurable Goods -4.4% -0.3% 2.8% 2.7% 0.4%
  Services 7.0% 3.7% 3.4% 3.6% 3.1%
Consumer Income          
  Real DPI -4.7% 0.4% 2.6% 3.4% 2.3%
    Per Capita -5.6% -0.4% 1.7% 2.4%  
Memo: Apr.07 Three-Mos Six-Mos One-Year
Savings Rate(Pct) -1.3 -1.0 -1.0 -1.2
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