Today the Bureau of Economic Analysis of the Department of Commerce released data on disposable personal income (DPI) and personal consumption expenditures (PCE) for the months of December and January. DPI is the income that remains after income taxes are deducted, and PCE is the amount of the remaining income that we spend. The difference between DPI and PCE, expressed as a percentage of the DPI, is known as the savings rate.

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.

According to today's report, DPI increased $14.3 billion, or 0.3 percent, in January and $35.1 billion, or 0.7 percent, in December. PCE decreased $25.4 billion, or 0.5 percent, in January, after increasing $42.5 billion, or 0.9 percent, in December. In January the annualized savings rate was 5.3 percent. In December it was 4.6 percent.

The January and December increases in personal income were affected by a number of special factors. The January increase was boosted by cost-of-living adjustments to several federal transfer payment programs, by cost-of-living adjustments and benefit increases in the Earned Income Credit program, and by pay raises for federal civilian and military personnel. The January change was lowered by a reduction in private employer contributions to pension plans from an unusually high level in 1995 and by retroactive social security benefit payments that boosted December personal income.

For all of 1995, total personal income grew by 6.1 percent. This compares with 4.94 percent during 1994 and is the biggest year-to-year gain in 6 years. Personal Consumption Expenditures grew by 4.8 percent in 1995 versus 5.5 percent in 1994. The PCE number for 1995 was the lowest yearly change since 1991, the last year of the most recent recession. The savings rate for all of 1995 was 4.5 percent, up from 1994's rate of 3.8 percent.

So, during 1995, incomes grew by 1.16 percent more than they did in1994. But, consumer expenditures in 1995 grew at a rate that was 0.7 percent slower than the growth rate for 1994. What's more, the January 1996 annualized savings rate of 5.3 percent was larger than any of the numbers for the preceding 10 months.

What's going on here? Could it be that the nation as whole has decided to spend less and save more? Could this be the dawning of a new era of frugality? We'll have to keep an eye on the situation during the coming months and years and see if the current tendencies persist.

Byline: Lafferty (MF Merlin)