What it means
The report has two halves. The income side measures personal income and disposable personal income, which is income after taxes.
The outlays side measures personal consumption expenditures, which cover everything households buy, plus interest paid on consumer debt and certain transfer payments. The gap between disposable income and outlays is personal saving.
Dividing saving by disposable income gives the personal saving rate, which shows what share of take-home money households keep. A rising saving rate suggests caution, while a falling rate suggests confidence or financial strain.
The report matters well beyond statisticians. Consumer spending makes up the largest part of the economy in the United States, so personal consumption expenditures are a leading clue to economic growth.
The report also contains a price index for consumption expenditures, which the Federal Reserve watches closely as a measure of inflation. Businesses use the data to judge demand.
A retailer can compare spending growth on goods and services separately, and a lender can see whether household saving is building a buffer against defaults. Investors read the figures to guess how the central bank might change interest rates.
The nuance is that the data are estimates that get revised as better information arrives. A single month can mislead, so analysts watch trends over several months and read the report alongside employment and retail sales data.
Revisions can change the story, as when an earlier estimate of saving is later raised or lowered by a full percentage point.
In practice
Real-world examples.
Example
A retail analyst sees that consumption rose 0.5% in a month while disposable income rose only 0.1%. She concludes that households are spending more of their income and expects the saving rate to have fallen. She checks the next release to see whether the pattern continues. A sustained fall would suggest households are drawing on savings or borrowing more.
Example
A central bank economist watches the price index for consumption in the report to judge whether inflation is easing. A slower rise supports a case for lower interest rates. He compares the figure with the central bank's target before updating his forecast. Markets often react within minutes of the release.
Example
A credit card company reads that the personal saving rate has climbed from 4% to 6%. It expects customers to spend more cautiously and plans for lower card volumes. The marketing team shifts its offers towards balance transfers and rewards that appeal to cautious customers.
Formula
Calculation
Personal outlays = personal consumption expenditures + personal interest payments + personal current transfer payments
Personal saving = disposable personal income - personal outlays
Personal saving rate = personal saving / disposable personal income
Suppose, in an illustrative month, disposable personal income is $20,000 billion, consumption is $18,200 billion, interest payments are $300 billion and transfer payments are $200 billion. Outlays = 18,200 + 300 + 200 = $18,700 billion. Saving = 20,000 - 18,700 = $1,300 billion. The saving rate = 1,300 / 20,000 = 6.5%.Case study
Seen in the real world.
Lakeland Consumer Bank is an illustrative, fictional lender that tracked the monthly report to plan its lending. For several months disposable income was flat while outlays rose steadily.
The chief economist noted that the saving rate had slipped from 6.5% to 4.5%. On disposable income of $20,000 billion, that meant saving fell from 20,000 x 0.065 = $1,300 billion to 20,000 x 0.045 = $900 billion.
She warned management that households were running down their buffers and that defaults might rise. The bank tightened its lending standards slightly and built up its loss reserves, and the illustrative lesson is that spending can outrun income for a while but eventually has to adjust. The economist added the saving rate to the bank's monthly dashboard so that the credit committee could follow the trend alongside delinquency figures.
Watch out
Common mistakes.
- Treating one month's figures as a trend, when estimates are volatile and often revised.
- Confusing personal income with disposable income, when the saving rate is based on income after taxes.
- Assuming outlays means only purchases of goods, when it also includes services, interest payments and transfers.
Questions
People also ask.
What does the report measure?
It measures the income households receive, the money they spend and the amount they save, and it includes a price index for consumption.
Why does the Federal Reserve care?
Consumption is the biggest part of the economy and the report's price index is a key measure of inflation, so it informs interest rate decisions.
How often is it published?
It is released monthly, with later revisions as more complete data arrive, so the exact dates should be checked on the Bureau of Economic Analysis calendar. Economists also use the saving rate as a gauge of consumer confidence, since people who feel secure tend to save less and spend more.
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