US Personal Income and Outlays

Calculated Risk does a thorough analysis of the current situation regarding Personal Income, savings rate, and how this impacts the economy:

The saving rate was boosted by the stimulus package, but this suggests households are saving substantially more than during the last few years (when the saving rate was close to zero).

The saving rate will probably dip - the stimulus boost is unsustainable - but then continue to rise (an aging population usually pushes the saving rate higher) and a rising saving rate will repair household balance sheets, but this will also keep pressure on personal consumption.

Although PCE increased in May (compared to April), Q2 2009 is off to a somewhat weak start, with PCE in both April and May slightly below the levels of Q1. Although it is possible that PCE will pick up in June, it seems likely that PCE will be flat to slightly negative in Q2 (although not the cliff diving of the 2nd half of 2008). The two-month estimate suggests a real PCE decline of 0.7% in Q2 2009.

Usually PCE and Residential Investment (RI) lead the economy out of recession, and right now both remain weak. As households increase their savings rate to repair their balance sheets, it seems unlikely that PCE will increase significantly any time soon.

Personal Consumption through May

From the US BEA:

Personal income increased $167.1 billion, or 1.4 percent, and disposable personal income (DPI) increased $178.1 billion, or 1.6 percent, in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $25.1 billion, or 0.3 percent.

In April, personal income increased $78.3 billion, or 0.7 percent, DPI increased $140.0 billion, or 1.3 percent, and PCE increased $1.0 billion, or less than 0.1 percent, based on revised estimates.

The pattern of changes in personal income and in DPI reflect, in part, the pattern of increased government social benefit payments associated with the American Recovery and Reinvestment Act of 2009.

First off, I'll mention why the world economy is very important to Malaysia, specifically the US. Malaysia is an economy which relies heavily on exports. Like it or not, Malaysia will never disentangle itself from the world economy. Some of you may be wondering, how about China, won't they be the new engine of growth for Malaysia? People, who think China will replace the US, are sadly mistaken. China is tied to the US more heavily than any other nation in the world, so whatever affects the US, affects China, and in turn affects Malaysia. Hence, this blog will heavily feature events that involve the US and the rest of the world in addition to Malaysia.

Ok, on to the PCE data. The key points here are that we see the effects of the stimulus package. Unfortunately, it didn't increase personal consumption as most people were predicting. In fact Americans took the money, saved all of it and spent none of it. It's understood people would save, given the extra income, but this is quite ridiculous. 165 billion in extra income and only 25 billion increase in Personal Consumption for May. For April, 78 billion in extra income and only 1 billion increase in personal consumption.

We look at the savings rate:

Personal saving -- DPI less personal outlays -- was $768.8 billion in May, compared with $608.5 billion in April.

It looks like that extra 160 billion dollars in extra income all went to savings! Whatever new money Americans are getting, they aren't spending it. And furthermore, when the stimulus stops, we are likely to see a negative effect on savings and consumption. Stimulus is not a re-occurring program and once it stops, people will allocate some of their budget from consumption to savings.