Why investors watch retail and consumer confidence indicators (Part 2 of 9)
Personal Income and Outlays
The Bureau of Economic Analysis for the U.S. Department of Commerce released its latest monthly report on the state of personal income and personal outlays, or consumer spending, in the U.S. on August 1.
Personal income is the dollar value of income received from all sources by individuals. Personal outlays include consumer purchases of durable and non-durable goods, and services. Income and spending are significant in fueling growth and activity in the economy. Income gives households the power to spend or save. Spending greases the wheels of the economy and keeps it growing. Moreover, income is the major determinant of spending. U.S. consumers spend roughly 95% of their income. Consumer spending directly accounts for more than two-thirds of overall economic activity and indirectly influences capital spending, inventory investment, and imports.
Highlights of the June report
The June personal income report was quite favorable. Income and spending were up, while inflation numbers were restrained at the core level. Personal income rose by 0.4% in June, matching the pace of the month before and meeting consensus expectations. The important wages and salaries component has been on the rise over the past two months. This suggests ample fuel for consumer spending in the near term.
On the outlays—or spending—front, personal consumption improved to a 0.4% boost in June after rising at a 0.3% rate in May. For June, spending strength was in durables—which was up 0.4%—and in non-durables —which was up 0.3%. However, services edged up only by 0.1% in June.
On the price front, the personal consumption expenditure (or PCE) inflation eased to a monthly 0.2% in June from 0.3% in May. Core PCE inflation, which excludes food and energy prices, softened to a 0.1% rise after a 0.2% gain in May. The headline PCE inflation posted at 1.6% versus 1.7% in the prior period. These figures give the Federal Reserve (or the Fed) some leeway to keep policy loose, as inflation is still below the Fed’s goal of 2.0%.
Inflation is one of the major causes for interest rate fluctuations in the economy. Certain exchange-traded funds (or ETFs) like the ProShares Investment Grade–Interest Rate Hedged ETF (IGHG) have major holdings in companies like Citigroup Inc. (C) and JPMorgan Chase & Co. (JPM). The SPDR Barclays Capital TIPS ETF (IPE) and the PowerShares Senior Loan Portfolio (BKLN) are designed to protect the investors against interest rate risk caused by inflation.
Changes in personal income signal changes in consumer spending. For instance, a period of rapid income growth may signal future gains in personal consumption spending as well. Conversely, a period of declining income growth could signal an impending recession. While consumers must still purchase necessities, discretionary purchases may decline or moderate.
The consumption—outlays—part of this report is even more directly tied to the economy, which we know usually dictates how the markets perform. Investors can see how consumers are directing their spending, whether they are buying durable goods, non-durable goods, or services.
Consumer spending accounts for more than two-thirds of the economy. Retail indicators such as the ICSC-Goldman Sachs store sales index, the Redbook index, and the motor vehicle sales index give a fair idea as to where consumer spending in the U.S. is heading.
Let’s take a quick look at each of these indicator releases in the next parts of this series.
Browse this series on Market Realist: