“Personal income decreased $1,516.6 billion in February”

Commenter R.J.S., MARKETWATCH 666

Personal Income down 7.1% in February, Personal Spending down 1.0%, PCE Price Index up 0.2%

The February report on Personal Income and Outlays from the Bureau of Economic Analysis gives us nearly half the data that will go into 1st quarter GDP, since it gives us 2 months of data on our personal consumption expenditures (PCE), which accounts for nearly 70% of GDP, and the PCE price index, the inflation gauge the Fed targets, and 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 report also provides us with the nation’s personal income data, disposable personal income, which is income after taxes, and our monthly savings rate…however, because this report feeds into GDP and other national accounts data, the change reported for each of those metrics are not the current monthly change; rather, they’re seasonally adjusted amounts at an annual rate, ie, they tell us how much income and spending would increase in a year if February’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 January to February…

Hence, when the opening line of the press release for this report tell us “Personal income decreased $1,516.6 billion (7.1 percent) in February“, that means that the annualized figure for US personal income in February, $19,945.6 billion, was $1,516.6 billion, or roughly 7.1% less than the annualized personal income figure of $21,462.2 billion for January; the actual change in personal income from January to February is not provided…similarly, annualized disposable personal income, which is income after taxes, fell by nearly 8.0%, from an annual rate of an annual rate of $19,210.5 billion in January to an annual rate of $17,678.2 billion in February…the components of the monthly decrease in personal income, which can be seen in the Full Release & Tables (PDF) for this release, are also annualized figures…in February, the reason for the $1,516.6 billion annualized decrease in personal income was a $1,584.1 billion annualized decrease in government social benefits to individuals, which was only slightly offset by a $37.7 billion annualized increase in business & farm proprietors’ income and a $15.6 billion annualized increase in interest and dividend income…wages and salaries, which fell by an annualized $0.2 billion, were barely a factor in February’s personal income change . . .

For the personal consumption expenditures (PCE) that will be included in 1st quarter GDP, BEA reports that they decreased at a $149.0 billion annual rate, or by nearly 1.0 percent, as the annual rate of PCE fell from $14,939.1 billion in January to $14,790.1 in February, after the January PCE rate was revised down from the originally reported $14,816.8 billion annually…the current dollar decrease in February spending resulted from a $155.9 billion decrease to $ 5,018.9 billion in spending for goods, a decrease which was evident in last week’s February retail sales report, which was only slightly offset by a $7.0 billion annualized increase to $9,771.2 billion in annualized in spending for services….total personal outlays for February, which includes interest payments and personal transfer payments in addition to PCE, fell by an annualized $141.5 billion to $15,267.7 billion annually, which left total personal savings, which is disposable personal income less total outlays, at a $2,410.4 billion annual rate in February, down from the revised $3,801.3 billion in annualized personal savings in January… as a result, the personal saving rate, which is personal savings as a percentage of disposable personal income, fell to 13.6% in February from January’s savings rate of 19.8%, which was still up from the saving rate of 8.3% in February of last year and still higher than any personal savings rate of the entire 1975 to 2019 period… 

Before personal consumption expenditures can be used in the 1st quarter 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 2012 prices = 100, which is included in Table 9 in the pdf for this report….that PCE price index rose from 112.481 in January to 112.740 in February, a month over month inflation rate that’s statistically 0.23026%, which BEA reports as an increase of 0.2 percent, following the PCE price index increase of 0.3% that they reported for January…then, applying that 0.23026% inflation adjustment to the decrease in February PCE shows that real PCE fell by 1.22482% in February, which the BEA reports as a 1.2% decrease……notice that when those PCE price indexes are applied to a given month’s annualized PCE in current dollars, it gives us that month’s annualized real PCE in those same chained 2012 dollars, which are the means that the BEA uses to compare one month’s or one quarter’s real goods and services produced to that of another….that result is shown in table 7 of the PDF, where we see that February’s chained dollar consumption total works out to 13,119.2 billion annually, 1.22497% less than January’s 13,281.9 billion, statistically the same as the real PCE decrease we just computed…

Finally, to estimate the impact of the change in PCE on the change in GDP, we have to compare real PCE from January and February to the the real PCE of the 3 months of the fourth quarter….while this report shows PCE for all those months on a monthly basis, the BEA also provides the annualized chained dollar PCE on a quarterly basis in table 8 in the pdf for this report, where we find that the annualized real PCE for the 3 months of the 4th quarter was represented by 12,999.1 billion in chained 2012 dollars…(note that’s the same figure shown in table 3 of the pdf for the 4th quarter GDP report)….then, by averaging the annualized chained 2012 dollar PCE figures for January and February, 13,281.9 billion and 13,119.2 billion, we get an equivalent annualized PCE for the two months of the 1st quarter that we have the data for so far….when we compare that average of 13200.55 to the 4th quarter chained dollar PCE of 12,999.1, we find that 1st quarter real PCE has grown at a 6.34% annual rate for the two months of the 1st quarter that are included in this report (note the math to get that annual rate: ((( 13,281.9 +13,119.2 ) / 2 ) /12,999.1 ) ^ 4 = 1.063445…growth at that rate means that if March real PCE does not improve from the average of January and February, which seems unlikely, growth in PCE would still add 4.39 percentage points to the growth rate of the 1st quarter…