BUSINESSWEEK ONLINE : NOVEMBER 13, 2000 ISSUE
BUSINESSWEEK INVESTOR Keep Your Eyes on Consumers Seemingly arcane data give warnings on the economy This is the 10th in an occasional series showing how major economic reports can affect the stock and bond markets. The consumer sector is the 800-pound gorilla of the U.S. economy. Household spending commands two-thirds of real gross domestic product, and in 1999 a surge in consumer purchases accounted for 84% of total economic growth. No wonder Wall Street, economists, and Federal Reserve Board policymakers avidly scrutinize the sector. The Fed cannot completely rest until the consumer calms down. Fittingly, buyers are profiled in reams of data (table). The most comprehensive is the Personal Income and Outlays report done by the Commerce Dept.'s Bureau of Economic Analysis. It's a scorecard of what consumers earn, pay in taxes, and spend each month. And its numbers on goods and services spending go directly into the GDP data. You can easily find the latest release at www.bea.doc.gov under ''GDP and related data.'' The personal-income report carries valuable information on three consumption patterns that can give you insight into economic growth, inflation, and monetary policy. But because of its broad coverage, the report is one of the last on consumers available for any month. As a result, Wall Street's reaction to the 8:30 a.m. data can be muted. On Oct. 30, for instance, when the BEA said that personal income rose 1.1% in September and consumer spending grew 0.8%, the financial markets had little reaction. Wall Street pays closer attention to earlier consumer reports, including the Census Bureau's retail sales report (profiled in BW--Sept. 20, 1999) which provides the basis for the data on goods spending in the income report. But the Street's indifference doesn't mean you should ignore the report completely. Keeping an eye on the income report can help you protect your portfolio from interest-rate jitters and unexpected inflation trends that could harm bond holdings or the stocks of rate-sensitive companies such as banks and builders. First, as its name implies, the income report covers all income earned by consumers. That runs the gamut from paychecks, rental income, dividends, interest, and government payments such as social security, farm subsidies, and welfare checks. After totaling up personal income, the BEA subtracts taxes and then adjusts for price changes. The result is real disposable income, also known as real after-tax income. Historically, real disposable income determines how much consumers can spend on goods and services. But since the mid-1990s, consumers have been cashing in some of the windfall from their expanding stock portfolios or rising home values. This use of past capital gains for current spending is the ''wealth effect,'' and the Fed is concerned that extra wealth has caused consumer demand to grow far faster than potential supply. In the long run, that's a prescription for accelerating inflation. The latest income report showed that real after-tax income was up 4% from the year before, but real consumer spending rocketed ahead at a 5.4% pace. Look to the income report to see if spending is slowing to a pace that relies more on income gains and less on wealth. Until that happens, the Fed will stay worried that domestic demand is too hot. Policymakers and economists also check the service-spending data in the report. ''Services are an ever more important part of spending, and they can only be found in the income and consumption report,'' says Evelina Tainer, an economist at Econoday.com, an economic-information Web site. Services account for more than 56% of all consumer spending, and service jobs make up three-quarters of all private payrolls. You can check the income report to see if demand for services has cooled off enough to loosen the labor markets a bit. The last crucial tidbit in the income report is the BEA's calculation of price changes in personal-consumption expenditures--what economists call the PCE deflator. This inflation tracker has grown in importance ever since Fed Chairman Alan Greenspan said it was his preferred measure over the consumer price index (CPI). In fact, the Fed has switched to the PCE deflator from the CPI in its economic forecasts. Tainer points out that the PCE deflator is derived from the CPI data but is calculated differently, using a complicated system known as the chain-weighting method. Tainer says the deflator is a better cost-of-living measure because it more accurately reflects consumers' changing purchases of goods and services. TWO TALES. Right now, the PCE deflator and the CPI are telling two different stories about core inflation, which excludes energy and food prices (chart). Core inflation, as measured by the CPI, has accelerated from 2% to 2.5% over the past year. But the PCE deflator has remained at about a 1.6% rate. In other words, Greenspan's pet inflation gauge isn't sounding any warnings bells yet, a good sign that rates will remain steady in coming months. In today's investing jungle, you have to keep an eye on the consumer. Insights gleaned from the personal income report will help you do just that. Use its monthly data to see how the Fed is mollifying that giant gorilla. By KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Keep Your Eyes on Consumers CHART: Two Views of Inflation TABLE: Tracking Consumers' Income and Outgo INTERACT E-Mail to Business Week Online

Copyright 2000-2008, by The McGraw-Hill Companies Inc. All rights reserved. Terms of Use   Privacy Notice