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Schwab Guide to Economic Indicators: Personal Income and Outlays by Christopher Burdick, Director, Economic Analysis, Schwab Center for Financial Research November 30, 2007 What is it? It's a comprehensive monthly summary of personal income and spending, produced by the Bureau of Economic Analysis (BEA). The report collects data about the individuals' income sources. The three main categories (with examples) consist of:
What is its relative importance? Medium. The report is monitored in conjunction with a variety of other economic indicators to help gauge the direction and strength of the economy, and what the Federal Reserve might do next with short-term interest rates. Though this monthly indicator is not as comprehensive and meaningful as the quarterly gross domestic product report (GDP), its timeliness can be important. When economic growth is thought to be near a turning point—up or down—this data can provide a monthly heads-up while quarterly data is awaited. What impact does it have on the market? The following descriptions of economic and financial-market behavior are general in nature. See the "How is it used?" section for more insight. Rising income and spending readings can depict economic strength. Declining readings typically reflect economic weakness. The overall economic backdrop, expectations of what is needed from monetary policy and where it's perceived to be headed play a major role with the direction of stock prices.  If the trend in the report is rising in a way that hints income and spending are overheating, bond prices could fall (yields rise) on the outlook for greater overall economic demand, potentially higher inflation and an increased chance that the Federal Reserve will hike interest rates. Stock prices may also fall. Why? A rise in bond yields can eventually make bonds more attractive once the fall in bond prices settles down. Compared to where the weights of stocks and bonds were in your portfolio, the typical thing to do in response to this change in valuation would be to sell a portion of your stock portfolio and put the proceeds into bonds. Even if corporate profit growth seems supported in this time of strong income and spending, the market will likely see it as being short lived given expectations for impending rate hikes and eventually slower economic growth. There's a scenario where stock prices could experience a temporary lift if the economic backdrop is subdued. Suppose income and spending come to life in a manner suggesting the overall economy could be on the verge of rebounding from a weak period. This can give a boost to stock prices even with an expected rise in bond yields. That's because the market's expectation of potentially higher profit growth from greater economic demand can initially be the more influential factor in favor of higher stock prices. That is, for a period of time, it can be the more-dominant driver of stock prices, overshadowing the negative impact of rising bond yields (as discussed above). While the renewed strength in income and spending might suggest an eventual need for Fed rate hikes, it probably wouldn't be deemed immediate because of an otherwise weak economic backdrop. It would likely take some time for other economic reports to strengthen in order to validate the existence of an economic recovery. Weak readings of income and spending could lift bond prices (reduce yields) based on expectations of less inflation pressure. Suppose the economy is strong but monetary policy had recently become tight (restrictive). Stock prices could improve on hopes of a halt in the Fed's rate-hike campaign, along with the possibility of a future injection of economic stimulus if the next move by the Fed is a rate cut. Weak readings of income and spending in conjunction with a weak economy probably wouldn't help stock prices. That's because the chance of recession and reduced corporate profits would likely be the dominant fears. How is it calculated? This section is broken down into two pieces: income and spending.
How is it used? This report is used to evaluate the ability and willingness of consumers to spend. That's important because consumer spending accounts for nearly two-thirds of all economic activity. The earlier descriptions of economic and financial-market behavior are general in nature. The personal income and outlays report requires special attentions for a few reasons. For starters, monthly changes in income don't always coincide with like changes in spending. For example, if income is rising but spending isn't, that's not necessarily a bad situation. That's because the ability—income—for future spending still exists. Consumers could just be taking a break from spending. If the break becomes extended, economic growth could become threatened. This would typically occur when prices of goods and services are dropping in a wide-spread manner—a deflationary environment. In this case, consumers often hold off from spending because they expect lower prices in the future. Corporate profits, in turn, typically suffer, causing job losses and a further reduction in consumer spending. During this period, the Fed would likely cut interest rates aggressively in order to stimulate the economy. In contrast, if spending is up and income is down, that may not be a sustainable trend. The ability to spend from income would be considered short-lived. The economy could be growing faster than its potential, likely causing a subsequent rise in inflation and the need for the Fed to raise short-term interest rates. Yet consumers utilize a variety of sources other than income to support spending. They also rely on savings, the sale of assets (stocks, bonds, real estate, etc.), and secured (such as home equity) and unsecured loans. Therefore, all the factors that support spending need to be monitored to assess the financial health of the consumer. In the long run, income is still considered the driving force. This report contains other representations of income.
Yet increased savings creates a source of funds for bank lending. Lending rates would likely fall and become more affordable if reduced consumer spending had slowed the economy. Thus, the availability of inexpensive loans could eventually help reinvigorate spending, investing and the growth rate of the overall economy. Therefore, the more important issue is that income is growing. Regardless of how it's used, it will likely support the economy sooner or later. While spending tends to help the quickest, it doesn't have to be the first or the only use of income to lift the economy. When is it released? The report is released approximately 30 days after the reference month and can be found on the BEA's home page. Click on "Personal Income and Outlays" for the latest report. Important Disclosures The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. (2007-5771) Return to Top |
Schwab Guide to Economic Indicators
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