Economic Indicators: Personal Income and Outlays

The “Personal Income and Outlays Report” (sometimes called the Personal Consumption Report) is issued by the Bureau of Economic Analysis (BEA) monthly. The report contains two sections, which together provide insight into consumer behavior and total economic consumption. The first section deals with personal income, while the other deals with personal outlays.

Personal income is a measure of income received from wages and salaries, dividends and interest, rental income, and the like. All are measured in actual dollars and usually expressed in percentage terms. Wages and salaries are the dominant contributor to the aggregate total.

Personal outlays are made up of mostly personal consumption on goods and services, but also includes interest payments made on non-mortgage debt and transfer payments to government or social services.

In 2016 about two-thirds of consumer expenditures were made for services and the rest for the purchase of goods. The largest services expenditures were for healthcare and housing. Non-durable goods, such as food and clothing, made up the largest part of non-services spending.

Why Personal Income and Consumption is important

Personal consumption drives almost 70% of our economic output as measured by gross domestic product (GDP).

The report shows current consumer spending versus money saved for the future. Higher levels of personal consumption often translate into short-term GDP growth, a sign of potential growth in the near term. However, if this consumption is at the expense of consumer savings and investment, this could hinder long-term growth.

Personal consumption patterns can also point to economic trends and which industries/companies might benefit or be hurt by changes in personal consumption patterns. For example, there are some goods or services that consumers will forgo if prices increase, while others that are more essential will not be as severely impacted by price increases.

The Fed has also anointed personal consumption expenditures with food and energy removed (the core PCE Index) as one of its favorite inflation indicators, some preferring it to even the Consumer Price Index (CPI). However, because the CPI will be released prior to this report, there is rarely much overall surprise and, therefore, little market reaction to the PCE index. (For more information, see The Consumer Price Index Controversy and The Consumer Price Index: A Friend To Investors.)

One important thing that is excluded from the personal income figures are capital gains, as from the sale of appreciated stock. In the past decade, there has been a lot of wealth created in the stock market for many investors. While there are no official measurements of it, capital gains represent a source of disposable income for many and, as such, the personal income figures are known to be incomplete.

Strengths of Personal Income and Consumption

• The core PCE Index (consumption with food and energy removed) is considered a valuable longer-term price indicator
• PCE represents the largest portion of GDP
• Savings rates highlight the potential future spending power of consumers

Weaknesses of Personal Income and Consumption:

• Released after many other indicators in the month, reducing its timeliness
• Not all sources of consumer income are included
• No extensive industry or demographic breakdowns