April and May PCE To Add 2.66 Percentage Points to Q2 GDP Growth

The May report Personal Income and Outlays from the BEA gives us nearly half the data that will go into 2nd quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for more than 2/3rds of GDP, and the PCE price index, which is used to adjust that personal spending data for inflation to give us the relative change in the output of goods and services that our spending indicated.  This same report also gives us monthly personal income data, disposable personal income, which is income after taxes, and our monthly savings rate.  However, because this report feeds in to GDP and other national accounts data, the change reported for each of those are not the current monthly change; rather, they're seasonally adjusted amounts at an annual rate.  In other words, they tell us how much income and spending would increase for a year if May's adjusted income and spending were extrapolated over an entire year.  However, the percentage changes are computed monthly, from one month's annualized figure to the next, and in this case of this month's report they give us the percentage change in each annualized metric from April to May.

Therefore, when the opening line of the press release for this report tell us "Personal income increased $37.1 billion, or 0.2 percent, and disposable personal income (DPI) increased $33.9 billion, or 0.2 percent, in May", they mean that the annualized figure for seasonally adjusted personal income in May, $15,896.7 billion, was $37.1 billion, or somewhat more than 0.2% greater than the annualized  personal income figure of $15,859.7 billion for April.  The actual, unadjusted change in personal income for April to May is not given.   Similarly, annualized disposable personal income, which is income after taxes, also rose by more than 0.2%, from an annual rate of an annual rate of $13,857.1 billion in April to an annual rate of $13,891.1 billion in May.  All the contributors to the increase in personal income, listed under "Compensation" and "Other Personal Income" in the press release, are also annualized amounts, which can be more clearly seen in the Full Release & Tables (PDF) for this release.  Thus, when the press release, or a news account copying from it says, "Wages and salaries increased $14.7 billion in May, compared with an increase of $40.4 billion in April.", that really means wages and salaries would rise by $14.7 billion over an entire year if May's seasonally adjusted increase in wages and salaries were extrapolated over that year, just as personal current transfer payments from government agencies rose at a $4.8 billion annual rate and interest and dividend income, sometimes the largest contributor to the monthly personal income increase, rose at a $9.7 billion annual rate in May.   Since the way the press release is written often leads to media reports that misleadingly parrot those lines the same way the BEA wrote them, we favor referencing the pdf in reviewing this report.

For the personal consumption expenditures (PCE) that we're most interested in today, BEA reports that they increased at a $53.5 billion annual rate, or by a bit more than 0.4 percent, as the annual rate of PCE rose from $12,645.9 billion in April to $12,699.4 in May.  That happened as the April PCE figure was revised up slightly from the originally reported $12,645.8 billion annually and March PCE was revised down from $12,526.5 billion to $12,504.7 billion, and prior months were slightly revised as well, all of which was already included in the 3rd estimate of 1st quarter GDP.  The current dollar increase in May spending resulted from a $20.8 billion annualized increase to an annualized $4,070.9 billion annualized in spending for goods, and a $32.7 billion increase to $8,628.5 billion in annualized spending for services.   Total personal outlays for May, which includes interest payments, and personal transfer payments in addition to PCE, rose by an annualized $57.0 billion to $13,160.4 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $730.6 billion annual rate in May, down a bit from the revised $753.7 billion annualized personal savings in April.   As a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 5.3% in May from April's savings rate of 5.4%.

As you know, before personal consumption expenditures are used in the GDP computation, they must first be adjusted for inflation to give us the real change in consumption, and hence the real change in goods and services that were produced for that consumption.  The BEA does that by computing a price index for personal consumption expenditures, which is a chained price index based on 2009 prices = 100, and which is included in Table 9 in the pdf for this report.   That index rose from 110.247 in April to 110.431 in May, a month over month inflation rate that's statistically 0.1669%, which BEA reports as an increase of 0.2 percent, following the PCE price index increase of 0.3% they reported for April.  Applying that inflation adjustment to the nominal amounts of spending left real PCE up 0.3% in May, after the April real PCE increase was revised from 0.6% to 0.8%.  Notice that when those PCE price indexes are applied to a given month's annualized PCE in current dollars, it yields that month's annualized real PCE in our familiar chained 2009 dollars, which are the means that the BEA uses to compare one month's or one quarter's real goods and services produced to another.  That result is shown in table 7 of the PDF, where we see that May's chained dollar consumption total works out to 11,500.2 billion annually, 0.2554% more than April's 11,470.9 billion, a difference that the BEA reports as 0.3%.

However, to estimate the impact of the change in PCE on the change in GDP, the month over month changes don't help us much, since GDP is reported quarterly.   Thus we have to compare April and May's real PCE to the the real PCE of the 3 months of the first quarter.  While this report shows PCE for all those amounts monthly, the BEA also provides the annualized chained dollar PCE for those three months in table 8 in the pdf for this report, where we find that the annualized real PCE for the 1st quarter was represented by 11,372.9 billion in chained 2009 dollars (that's the same as is shown in table 3 of the pdf for the revised 1st quarter GDP report).   Then, by averaging the annualized chained 2009 dollar figures for April and May, 11,470.9 billion and 11,500.2 billion, we get an equivalent annualized PCE for the two months of the 2nd quarter that we have PCE data for so far.   When we compare that average of 11,485.6 to the 1st quarter real PCE of 11,372.9, we find that 2nd quarter real PCE has grown at a 4.02% annual rate for the two months of the 2nd quarter we have. (Note the math to get that annual rate: (((11,470.9 + 11,500.2) /2) / 11,372.9) ^ 4 = 1.040213.  That's a pace that would add 2.66 percentage points to the growth rate of the 2nd quarter by itself, even if there is no improvement in June PCE from that average.


(note: the above was excerpted from my weekly synopsis at Marketwatch 666)

Subject Meta: 

Forum Categories: