by Calculated Risk on 8/31/2007 03:40:00 PM

The BEA released the Personal Income and Outlays report for July this morning. At MarketWatch, Rex Nutting has an overview of the data: Inflation remains moderate in July. It is important to remember this is pre-turmoil data.

I want to focus on how the monthly data contributes to the quarterly BEA report.

You can use the monthly series to exactly calculate the quarterly change in PCE. The quarterly change is not calculated as the change from the last month of one quarter to the last month of the next (this is a common misunderstanding). Instead, you have to average real PCE for all three months of a quarter, and then take the change from the average of the data for the three months of the preceding quarter.

So, for Q3, you would average real PCE for July, August and September, then divide by the average real PCE for April, May and June. Of course you need to annualize this rate (take it to the fourth power).

Once we have two months worth of data (after August is released) we can estimate the PCE contribution to the GDP report using the Two Month Method, see Estimating PCE Growth for Q2. The Two Month method is very accurate, and the correlation to the actual quarterly data is high (0.92).

With the release of the July report, we now have the first data point for Q3. To estimate the contribution to the quarterly growth in real PCE, we should look at the growth in real PCE from April to July, not June to July (as is common).

From April to July, the increase in real PCE spending was 1.6% annualized. Still sluggish, but not recessionary. Perhaps real consumer spending will pick up in August and September.