Just days after the BEA admitted it had found a “problem” with the way it calculates GDP, leading to a dramatic revision to GDP data and a preliminary Q2 GDP estimate that was less than half what consensus had forecast, earlier today the same BEA released personal income and spending data that was also revised. Materially. And while we reported earlier the deterioration in the annual change, what was more notable is how the adjustment impacted historical disposable personal income, if not so much spending.
This is what the BEA reported at 8:30am this morning:
- DPI was revised upward $0.2 billion, or less than 0.1 percent, for 2013, $108.8 billion, or 0.8 percent, for 2014, and $116.6 billion, or 0.9 percent, for 2015. The percent change from the preceding year in real DPI was the same as previously published in 2013, decreasing 1.4 percent. It was revised upward from an increase of 2.7 percent to an increase of 3.5 percent in 2014, and was the same as previously published in 2015, increasing 3.5 percent.
- Personal outlays was revised downward $30.0 billion, or 0.3 percent, for 2013. It was revised upward $3.0 billion, or less than 0.1 percent, for 2014, and $18.7 billion, or 0.1 percent, for 2015. Revisions to personal outlays primarily reflected revisions to PCE.
Visually, while the personal outlays revisions were practically negligible…
… Personal income saw some dramatic changes for the years 2014 and 2015…
… even as it has since converged with the pre-revision number.
What the revised personal income data showed is that while wages may have grown faster in the period 2014 and 2015 than originally estimated, on a net basis, incomes have slowed down enough to catch up to the pre-revision number. In fact, the annual growth in revised personal income is now the lowest since 2013. That in itself should be a big red flag, and a troubling hint why the US consumer has been feeling under the weather over the past year.
But what is the real surprise in today’s data?
Recall that personal saving is simply the difference between Disposable Personal Income and Personal Spending or Outlays. And since spending remained unchanged after the revision while incomes are now said to have grown far more, only to see their rate of growth slow down substantially, it means that the rate of change in US personal savings was also significantly impacted.
As an aside, as recently as April, the US consumer was said to have been on a saving spree, with the average Personal Savings Rate surging from just over 4% in early 2014 to 6% as recently as March. However, as a result of the new income data, we now know that the US savings rate was actually far higher starting about two years ago, and maxed out in early 2016, just fractionally higher than where it had been two years earlier, as opposed to the dramatic rise according to the pre-revised data.
What’s more, after the release of the revised data, we know that the savings rate has just hit the lowest level in over 2 years.
While we doubt if this revised data set is accurate (we expect everything will be scrubbed after the US admits it is in a recession), pending revision the implication is clear: while previously the concern was that the US consumer was hunkering down and refusing to spend (and was instead saving), which many economists used as an excuse to justify the weak economic growth in late 2015 and early 2016, a far different picture has emerged after today’s revised release. Instead of saving, US consumers were, over the past several months, doing precisely what they are so good at – spending up a storm, and since income did not keep up with the spending, this spending was funded to a large extend by savings.
That means, however, that as of this moment, absent a substantial pick up in wages and disposable income in general, US spending – that key driver of US GDP – is about to slow down sharply as the savings rate enters the red zone. As shown in the chart above, every time the savings rate hits about 5%, consumers slow down. The problem is that it comes just as spending in Q1 supposedly soared.
This also means, that absent a significant pickup in other GDP contributors such as inventory restocking, capex spending or trade, GDP is about to tumble into contraction. The problem, as Deutsche Bank showed over the weekend, is that the non-consumer economy is already in recession.
And now, the consumer economy may be about to throw in the towel too.
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