US GDP Growth Since June 2009; PCEs

According to the NBER, the recession ended in June 2009.  The above graph shows the quarterly percentage change in growth since 2009 and also shows how personal consumption expenditures have added to that growth.  What we see is a fairly consistent pattern of PCEs adding to GDP growth since 3Q09.

Let's look at the components of PCEs:

Above is a chart that shows the percentage change in the three main PCE components: durable goods (blue), non-durable goods (gold) and services (light green).  Service consumption (which accounts for about 65% of PCEs overall) has been strong since 1Q2010 while durables (which account for about 10% of PCEs) have been strong for five of the last six quarters.  Non-durables have been pretty weak throughout.  

1952 PCE's

The above chart shows the percentage contribution that personal consumption expenditures (PCEs) made to GDP in 1952, along with the contribution of the subparts of the PCE statistic.  The second and fourth quarter were the big months for PCEs, with the second quarter's growth being drive by non-durable goods while the fourth quarter's growth was driven by durable goods purchases.  The first quarters contributions were incredibly weak, with an actual contraction in non-durables being the reason for the contraction.  Also note the drop in durable purchases in the third quarter.

The reason for the large drop in durable goods purchases in the third quarter was a large steel strike, which shutdown auto manufacturing.  With the strike ended in the fourth quarter, auto production ramped back up, leading to higher production and, therefore, more durable goods.

Regarding the expansion and increased use of consumer debt, consider the following from the 1953 economic report to the president:

1951 PCEs, Income and Savings

The above chart shows PCEs contribution of overall economic growth during 1951 and the contributions of each sub-part of PCEs to overall PCE growth.  The first quarter saw a tremendous surge as consumers anticipated shortages caused by the Korean war effort.  In essence, these purchases pulled purchases ahead to the first quarter, which explains the huge drop-off in purchases during the second quarter.  During quarters three and four we see a return to more normal contributions of overall growth.

Let's look at these figures from a few other perspectives:

PCEs grew at a strong seasonally adjusted annual rate in the first quarter, contracted in the second quarter and returned to more normal rates of growth in the third and fourth quarter.

Or, the year over year percentage change was sharply higher in the first quarter, but leveled off in the second through fourth quarter.

A big part of the fuel for the PCE growth came from the increase in real disposable personal income.  The above chart shows that this increased every quarter in 1951, and increased at a very strong rate in the second quarter and a decent rate in the third quarter.

 The real YOY increase in DPI was also very strong, indicating the increases were consistent.

The charts above are from the Economic Report to the President in 1952,  The top figure shows income and its sources and the second shows average hourly and weekly manufacturing wages.  The top figure shows a large jump in savings in the latter part of the year, as consumers slowed their pace of consumption.  As the second chart shows, inflation took a big bite out of wage growth for manufacturing employment during the year.

The above chart shows the importance to durable goods purchases to consumer spending during 1951.  It also shows the incredible level of pent-up demand that was unleashed on the economy in the post-WWII years.

A Closer Look At Personal Consumption Expenditures

Let's take a look at the latest Personal Income/Consumption Report from the BEA.

Here is a link to the report.

First, let's note some important percentages. By far, services comprise the largest segment of PCEs, representing 65.56% of total expenditures. Non-durable goods make up the second largest percentage at 21.90% and durable goods make up 12.54%. In other words, the cash for clunkers (C4C) impacted the smallest percentage of PCEs.

Here are the charts of the data:



Total real service expenditures have been increasing for the last three months. However, mind the scale of the right.



Spending on non-durables (goods that last less than three years) has been decreasing since March, but saw a big increase last month. There were two big events last month -- C4C and back to school shopping.



Real spending on durable goods was already increasing. C4C helped to spike the spending but it was already increasing at a slow rate.

What does this tell us?

1.) Note that on the chart of spending on services it appears that spending bottomed out in the earlier part of this year. As this is the largest percentage of PCEs this bottoming is a good development.

2.) Non-durables are still a wild-card.

3.) Real durables purchases were already increasing before the C4C and appear to have bottomed out as tell. The real question will be what happens over the next several months to this number.

A Closer Look At Personal Consumption Expenditures

Notice the following on the above chart:

1.) PCEs fell out of bed last year -- notice the high month over month and year over year drops.

2.) This year PCEs have returned to more "normal" month over month increases.

3.) The year over year number appears to be bottoming.

This is the same pattern retail sales have displayed. Consumers stopped spending last year and have now returned to the market in a more limited manner.

More on PCEs

Let's take a look at a new set of charts -- the year over year change (YOY) in PCEs and the three sub-categories of PCEs. Please click on all images for a larger image.

Let's start with the YOY of overall PCEs



Notice that the overall rate of YOY change in PCEs is the lowest it's been in almost 50 years. That alone should tell you something about the severity of the current situation. Let's look at the subcategories from the largest to smallest (services, non-durables and durables).


Real YOY service expenditures are nearing the lowest level they have seen in 50 years. But ...



It's the year over year drop in non-durables that's really hitting PCEs right now.

People have pulled back from goods that will last less than 3 years.


Durable goods year over year percentage change is low -- but we've seen these lows before. Not that it's a good thing, mind you, just that we've seen these levels before.

So -- what have we learned?

1.) People have really cut back on spending.

2.) The big area where they have cut back is non-durable goods.

When will the consumer come back? That's a good question. As I noted in today's market recap, consumers have lost over 20% of net worth since the 2Q of 2007. That's going to keep them in the wealth building as opposed to spending more for some time.

So -- What Are People Buying These Days?

Last Friday the BEA released the personal income and expenditure report. I wanted to dig a bit deeper into the data to see what it says.

First, here is a graph of total personal consumption expenditures:



Click for a larger image

Note that this statistic has been neutral for the June - August period and it ticked down in the August to September period. In other words, the slowdown started about 4 months ago when people started to spend a bit less on things.

The report breaks expenditures down into durables goods expenditures, non-durable goods expenditures and service expenditures.



Click for a larger image

Service expenditures continue to tick up.



Click for a larger image

Non-durable goods rose until July but have retreated for the last two months. Remember -- these are goods that will last less than three years.



Click for a larger image

Durables goods numbers have been decimated over the last 7 months. Let's also assume that durable goods purchases are a proxy for consumer confidence. Durable goods last more than three years. Therefore, there is a higher probability a consumer will purchase these goods on credit. With credit and the job market contracting there is little reason for consumers to get into a long-term financing arrangement right now.

In other words, consumers aren't that confident right now.

Personal Consumption Expenditures Flat

From the WSJ:

In the latest worrisome signs for the economy, consumer spending stalled in January, after adjusting for rising prices, and income growth slowed.

The Commerce Department said personal spending rose 0.4%, but was unchanged after adjusting for inflation. Such spending was also flat in December and October.

"Households limped into 2008 reeling from higher energy costs, falling home values, less credit availability and weakening employment," said Bank of America senior economist Peter Kretzmer in a note to clients.

.....

The price index for personal consumption expenditures, an inflation gauge watched closely by Federal Reserve policymakers, rose 0.4% in January from the previous month and was up 3.7% from a year ago. Excluding food and energy, prices rose 0.3% and increased 2.2% from January 2007 -- above the Fed's preferred range of 1.5% to 2%.

As IBD stated:

"People are spending all they earn and more just to keep up with inflation," said Joel Naroff, chief economist at Naroff Economic Advisors. "When you adjust for inflation, all that households did was run in place."

Above is a chart from Econoday of real disposable personal income -- income adjusted for inflation. Notice it has been trending down for the last 6 months on a year over year basis.



Above is a chart of real personal consumption expenditures -- consumption adjusted for inflation. Notice it too has been decreasing for the last 4-6 months and is not negative on a year over year basis.



The above chart -- also from Econoday -- shows the University of Michigan consumer sentiment indicator. Notice this indicator has been dropping for the better part of the last year. Dropping income contributes to lower consumer sentiment.

So -- 70% of the economy is clearly slowing. That does not bode well for overall economic growth.

Consumer Spending Increases

From the BEA:

Personal income increased $40.2 billion, or 0.3 percent, and disposable personal income (DPI)increased $37.2 billion, or 0.4 percent, in August, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $54.8 billion, or 0.6 percent. In July, personal income increased $61.5 billion, or 0.5 percent, DPI increased $60.3 billion, or 0.6 percent, and PCE increased $37.3 billion, or 0.4 percent, based on revised estimates.

From Bloomberg:

Consumer spending in the U.S. rose more than forecast in August, a sign the fallout from a weaker job market and collapse in subprime lending has yet to reach the biggest part of the economy.

The 0.6 percent rise in spending was the biggest in four months and followed a 0.4 percent increase in July, the Commerce Department said today in Washington. The Federal Reserve's preferred measure of inflation cooled.

Lower gasoline prices, auto-dealer discounts and a jump in air-conditioning use during last month's hot spell lifted demand, economists said. Smaller price increases give Fed policy makers room to reduce interest rates again should job losses and declines in home values lead to a deeper slowdown.

``Consumers were out in force in August even though we had the credit crunch'' mid month, said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who correctly forecast the gain in spending. ``Inflation is behaving quite well.''

Here is a chart of chained (inflation-adjusted) personal consumption expenditures.



Here is a chart of the month-to-month percent change in the chained dollar figures



The big reason for the jump was a 2.8% increase (in chained 2000 dollars) of durable goods. However, this figure has been jumping around quite a bit:



In general, these are very good numbers. Last month's increase was good and this month's increase is better. However, I would caution that the big jump is from durable goods. Considering these are usually more expensive items that require financing, we need to look with caution to next month's numbers.

Real PCEs Increase

From the BEA:

Real DPI -- DPI adjusted to remove price changes -- increased 0.5 percent in July, compared with an increase of 0.2 percent in June.

Real PCE -- PCE adjusted to remove price changes -- increased 0.3 percent in July, compared with an increase of less than 0.1 percent in June. Purchases of durable goods increased 0.5 percent, in contrast to a decrease of 1.8 percent. Purchases of nondurable goods increased 0.4 percent, compared with an increase of 0.1 percent. Purchases of services increased 0.2 percent, compared with an increase of 0.3 percent.

PCE price index -- The PCE price index increased 0.1 percent in July, compared with an increase of 0.2 percent in June. The PCE price index, excluding food and energy, increased 0.1 percent, compared with an increase of 0.2 percent.

Here's the chart that really matters -- the inflation-adjusted monthly, seasonally-adjusted annual rate of PCEs. We see an uptick in this months number which is encouraging. The last five months have been a bit stagnant. However, one month does not an increasing trend make. As I said -- this is encouraging but not definitive.

Wal-Mart And Home Depot Reports Lead to Concerns About Cosumer Spending

From Bloomberg:

Wal-Mart Stores Inc. and Home Depot Inc., the two largest U.S. retailers, said the housing slump, rising mortgage defaults and high energy prices will depress earnings for the year.

``U.S. consumers continue to be under difficult pressure economically,'' Wal-Mart Chief Executive Officer H. Lee Scott said on a recorded call today. ``It is no secret that many customers are running out of money toward the end of the month.''

Wal-Mart, the world's largest retailer, fell $2.29, or 5 percent, to $43.88 at 12:32 p.m. in New York Stock Exchange composite trading for the biggest drop since July 2002. Home Depot fell $1.02, or 2.9 percent, to $34.22. They have declined 15 percent this year.

....

Home Depot Chief Executive Officer Frank Blake said today that the U.S. home-improvement market will ``remain soft'' due to slowing home sales and declining house prices.

Second-quarter net income fell to $1.59 billion, or 81 cents a share. Revenue dropped 1.8 percent to $22.2 billion, the first decline in four years.

Excluding the company's HD Supply unit, earnings were $1.52 billion, or 77 cents a share. On that basis, analysts estimated 73 cents. Sales were predicted to be $22.6 billion.

Sales in stores open at least a year decreased 5.2 percent, the fifth straight decline.

Wal-Mart is by far the largest discount retailer, with a market cap of $189 billion. The next largest is Target with a market cap of $53 billion. According to Wal-Mart's latest annual income statement, they did $348.6 million in sales. Bottom line -- they're a really big company and what they say about the consumer is very important and relevant financial information.

Home Depot is the largest home building store with a market cap of $70 billion. They are almost twice as large as their nearest competitor Lowe's whose market cap is $41.8 billion. According to their latest annual income statement, HD had $90 million in annual revenue. Again -- what they say about the consumer is very important.

Let's relate this to the overall economic picture.

Here's a graph of the last few months reports of personal consumption expenditures from the Bureau of Economic Analysis. These figures are the seasonally adjusted annual rate in 2000 chained dollars. Notice that the figures haven't really moved much in the last 5 months.



Here is a chart of year-over-year annual change in retail sales from the blog Calculated Risk. The gray bars are retail sales adjusted with the personal consumption deflator. Notice the trend is down both for teh adjusted and unadjusted numbers.



In the latest GDP report, Personal consumption expenditures increased 1.5%. This falls under the luke-warm heading -- not great but not bad. However, it does indicate the consumer is slowing down in his spending for now.

More On PCEs

Here is a chart of the month over month percent change in personal consumption expenditures in chained 2000 dollars. Notice the drop-off.



Also see The Big Picture and Calculated Risk

A Deeper Look At Consumer Spending

Here is a graph of the year-over-year percent change in consumer spending in chained 2000 dollars. DG = Durable Goods, NDG = Non-Durable Goods and Service = service (duh). Pay particular attention to the first two areas of change. They represent the first year over year levels of consumption expenditures coming out of a recession. Here is the point of this graph. Consumption expenditures are still strong on a year-over-year basis. Until we start seeing YOY comparisons like those in the first few quarters after the recession the economy should be doing OK.

Income and PCE Up

From the BEA

Personal income increased $108.1 billion, or 1.0 percent, and disposable personal income (DPI)increased $73.0 billion, or 0.8 percent, in January, according to the Bureau of Economic Analysis.
Personal consumption expenditures (PCE) increased $51.9 billion, or 0.5 percent. In December,personal income increased $55.7 billion, or 0.5 percent, DPI increased $46.0 billion, or 0.5 percent, and PCE increased $69.4 billion, or 0.7 percent, based on revised estimates.

These are good numbers and probably partially explain the increase in spending we are seeing.

However, core PCE -- a measure of inflation -- increased .3% and core PCE incresed 2.3% year-over-year. These numbers add further fuel to the argument the Fed won't be lowering rates anytime soon.

How Long Can This Trend Last?

This is a chart of the percent change from the preceding quarter in personal consumption expenditures.



The last time this figure decreased was in 1992. That is 16 years ago. How long can this trend of positive growth continue? The US savings rate (income - expenditures) has been negative for the past 5 quarters.




Household debt has increased to over 90% of GDP and 120% of disposable income. US households greatly increased debt acquisition over this expansion, as this chart of the year-over-year percent change in household debt indicates.



Debt payments now consume the largest amount of disposable income on record.



How much more can the US consumer purchase before he pulls in his wings?