Personal Income and Outlays

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Xiao Chen Low

Personal income and outlays track personal income and monthly spending of individuals in the U.S. These two data points are produced monthly by the Bureau of Economic Analysis. It is an important economic indicator to help gauge the strength of the consumer sector in the U.S.^[1]

Personal income encompasses all sources of income, such as 1. wages and salaries 2. fringe benefits like employer contributions of private pension plans 3. rental income 4. dividends and interest and transfer payments such as Social Security and unemployment compensation. As U.S. consumers spend approximately 95 cents of each dollar received, income becomes a major determinant of spending. As a result, change in income level becomes an important indicator of the health of the economy.

On the other hand, outlays consist mostly of personal consumption expenditures like purchase of durable goods, nondurable goods and services. Personal interest payments and transfer payments are also included in this category.^[2] Besides reporting the level of personal income and outlays, the Bureau of Economic Analysis also computes the personal consumption expenditure price index, also known as PCE price index. Unlike CPI which measures a fixed basket of goods and services, the PCE price index uses a basket of goods and services that is updated manually.

Changes in taxes and social security cost of living adjustments are factors that cause the variations in monthly changes in disposable income.^[3]‎

The monthly chances in personal consumption are generally skewed by large variations in spending on durable goods.^[4]‎

Why is it important

Personal income and outlays provide insights into the strength of the consumer sector in the economy. The level of income individuals receive dictates how much they can spend or save. Savings that are invested in the financial markets can drive up the prices of stocks and bonds. That being said, the consumer outlays of the report has a bigger impact on the market as it is tied closer to the economy. As consumer spending accounts for more than two-third of the economy, the report gives investors a good picture of where consumers are spending their money on and which sectors are doing better than the others. However, financial market participants still pay more attention to retail sales announcement than personal consumption expenditure.^[5]

References

1. ↑ Investopedia.com
2. ↑ Econoday: 2010 Economic Calendar
3. ↑ Seeking Alpha: With Rising Disposable Income Numbers, Recession Won't End
4. ↑ BEA: National Economic Accounts
5. ↑ Econoday: 2010 Economic Calendar