Why changes in personal consumption affect bond investors
The Personal Income & Outlays Report
The Personal Income & Outlays Report was released on Monday, March 3, by the Bureau of Economic Analysis. Personal consumption expenditures (or PCE) is the primary measure of consumer spending on goods and services in the U.S. economy. It accounts for approximately two-thirds of domestic final spending, which makes it a very important driver for determining future economic growth.
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Changes in personal income and expenditure are an important gauge of economic growth. The difference between DPI and PCE is the amount individuals have saved and, usually, invested. Other things remaining constant, a real increase in PCE would mean the economy is expanding, which (keeping other factors constant) would cause bond prices to fall and interest rates to increase. A decrease in real PCE would imply the reverse. However, an increase in the savings rate could cause increases in asset prices.
Key inflation determinant for the Fed
Another important headline number from this release is the Personal Consumption Expenditures Price Index, which is used by the Federal Open Market Committee (or FOMC) to measure inflation. An increase in inflation has the impact of increasing nominal rates on bonds and lowering prices.
To find out the impact of another housing market indicator, move on to Part 9 of this series.