Today the Commerce Department's Bureau of Economic Analysis issued its monthly Personal Income and Outlays report. The report provides information about changes in Disposable Personal Income [DPI] and Personal Consumption Expenditures [PCE] during September.

DPI is the income that's left over after income taxes are deducted. PCE is the amount of that left-over income that we all spend for the stuff we buy.

If you're a regular reader of Economic Indicators you know that Personal Consumption Expenditures constitute 2/3 of the Gross Domestic Product. What's more, historically there has been a strong direct relationship between personal income and personal consumption. In recent years approximately 96% of Disposable Personal Income has gone into Personal Consumption Expenditures. The bottom line is that personal income is the primary source of fuel for the nation's economic engine. If you and I and everybody else, on average, are not making real gains in the amount of money we have available to spend, then there's a good chance that the economy will slow down or, perhaps, grind to a halt.

The income and expenditure figures quoted in last month's article were current dollar numbers. They were not adjusted to remove the effect of inflation. It is more appropriate to state these numbers in inflation-adjusted numbers [constant-dollar numbers] so that they may be compared directly with Real [inflation-adjusted] GDP. From now on, whenever the data is available, constant-dollar numbers will be used to represent the data discussed in these articles.

In September, Disposable Personal Income rose by 0.4% and Personal Consumption Expenditures rose by 0.2%. For the year to date, the annual rates of Disposable Income and Consumption Expenditures grew by 4.06% and 3.73%. The following table shows the annual percentage changes for both of these indicators from the post-recession year of 1991 up to the present.

                 1991   1992    1993   1994   1995(Sept)
DPI % Change    +0.40  +3.10   +1.53   +3.55  +4.06
PCE % Change    -0.02  +1.91   +3.02   +3.52  +3.73

The 1995 year-to-date results for both indicators are the best in the five-year period. So, it appears that DPI and PCE are both making an increasingly positive contribution to the Gross Domestic Product.

In other news, yesterday the Association for Manufacturing Technology announced that orders for American-made machine tools jumped by 39% in September. For the year to date, orders were $3.70 billion, 10.7% higher than the same period last year. It seems that American manufacturers are becoming more confident about the outlook for the economy and they are expressing that confidence by increasing their investment in the equipment they use to produce goods.

Byline: Lafferty (MF Merlin)