Personal Income and Outlays

Study Notes:

The Personal Income and Outlays data release is a report that provides useful information concerning income, spending, savings and prices. The most important data points in the report are personal income, personal consumption expenditures (PCE), personal savings, and the PCE price index. Personal income is defined as the total income received by all persons from all sources. Personal consumption expenditures is based on the value of goods and services purchased.  Personal savings is calculated as personal income minus spending and taxes. The PCE price index is a measure of prices based on personal consumption expenditures. Overall, the data released in the monthly report are seasonally adjusted and adjusted for inflation. Personal income and outlays are calculated at The Bureau of Economic Analysis or BEA by using a mix of estimates from professional trade organizations and government agencies. The report is generally released around the last Friday of each month at 8:30am eastern time. The BEA provides personal income and outlays data so that investors, Congress, policymakers, business and community leaders have the information they need to make informed decisions that affect the American economy.

Personal consumption expenditures are an integral part of U.S. GDP, making up approximately 70 percent, and accounting for more than most of the world. This monthly report essentially tells us what 70% of the quarterly GDP report will look like. If consumption is strong, medium or weak, quarterly GDP data would confirm that. Stock bulls would cheer strong consumption trends as that will lead to revenue and earnings growth across corporate America. Weak consumption trends will likely lead to negative sentiment as companies will need to lower expenses to continue to grow earnings. These internal efficiency improvements boost the bottom line by cutting costs rather than by growing revenues, the more preferred and sustainable way to increase earnings. This report also provides insights on whether consumption trends are being driven by income or savings. If they’re driven by savings, there are risks that consumption could begin to slowdown as the savings level dwindles. While consumption driven by income is a positive indicator and supports higher savings. It means consumption trends have a higher probability of remaining strong. Watching the personal savings rate in the personal savings and outlays report is useful in analyzing whether consumption is being driven by income or by savings.

The personal income and outlays report may move the market because the PCE price index is the Federal Reserve’s preferred inflation gauge. Higher than expected readings could lead to increased expectations of monetary policy tightening. Lower, stable readings may lead to expectations of monetary policy loosening. Historical evidence suggests that tighter monetary policy risks recessionary outcomes and in effect, lower stock prices. Soft landings occur when central banks tighten policy without causing a recession. Soft landings are certainly a possible outcome and have successfully occurred in the past.

Leading indicators are useful in forecasting information about income, spending, savings and prices. Taken together, unemployment claims, housing permits, purchasing managers’ index for manufacturing, retail sales, durable goods orders, the yield curve, money supply and consumer confidence are useful in providing monthly insights prior to the monthly release of the personal income and outlays report. In addition, inflation gauges like the consumer price index and producer price index released by the U.S. Bureau of Labor Statistics are provided earlier in the month and provide data on the directional trend of inflation. They correlate with the PCE price index and are useful when analyzed together.

Consumption fuels the U.S. economy and tighter policy has a history of causing economic slowdowns and recessions. Watching the personal income and outlays report at the end of the month provides strong awareness concerning the path of the U.S. economy and the path of the FED.