Earlier today I posted my monthly update of the year-over-year change in the Bureau of Economic Analysis (BEA) Personal Consumption Expenditures (PCE) price index since 2000. My focus was on the PCE index as a measure of inflation.

Now let's look at the PCE data to understand what the latest numbers are telling us about a key driver of the U.S. economy: "Real" Disposable Income Per Capita. What we discover is that, adjusted for inflation, per-capital disposable incomes have flatlined for the past 22 months and is currently at about the same level as November 2006.

The first chart shows both the nominal per capita disposable income and the real (inflation-adjusted) equivalent since 2000.

 

 

The BEA uses the average dollar value in 2005 for inflation adjustment. But the 2005 peg is arbitrary and unintuitive. For a more natural comparison, let's compare the nominal and real growth in per capita disposable income since 2000. Do you recall what you we're doing on New Year's Eve at the turn of the millennium? Nominal disposable income is up 49.2% since then. But the real purchasing power of those dollars is up a mere 14.6%.

Real DPI per capita is at a level first attained in the Autum of 2006 and remains about 0.7% below the level at the beginning the 2007-2009 recession. In fact, this metric of consumer well-being has essentially hovered around a flatline since June of 2010.

 

 

The mainstream media focuses on nominal disposable income with little or no attention to population or inflation adjustment. The "real" story in the latest PCE data is one of continued economic weakness.

Let's take one more look at real DPI per capita, this time focusing on the year-over-year percent change since the beginning of this monthly series in 1959. I've highlighted the value for the months preceding recessions to help us evaluate the recession risk for the current level.

 

 

As we can see, the current level is lower than the month preceding every recession over the history of this data. There have been a few anomalous months when the YoY was lower without an associated recession: 1976, 1987, 1992 and 2005. Suffice to say that we need this indicator to show some solid improvement in the months ahead.

An economy with out real disposable income growth is heading for trouble.

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Note: My BEA data source is the National Income and Product Accounts (NIPA) Tables. Table 2.6 (Personal Income and Its Disposition, Monthly) is available here. A couple of hours after the BEA announcement, the St. Louis Federal Reserve posts the data in FRED (Federal Reserve Economic Data) with separate tables for the nominal and real per capita data: DPI Nominal and DPI in chained 2005 dollars.