Preface from dshort: Today's Bureau of Economic Analysis release on Personal Income and Outlays reported that consumer spending increased by .4 percent in July, which was more than analysts expected. I read the release shortly after posting the latest update from the Consumer Metrics Institute.

The BEA release is, of course, a rear-view look at the data with relatively little fine detail. But the claim that consumer spending increased in July runs counter to the virtually real-time insight into consumer behavior provided by the Consumer Metrics Institute for this period.

So I emailed Rick Davis, the President of the Institute, for his perspective on how the BEA consumer data relates to the Institute's data. Here is his response.

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Rick Davis: I do look at the BEA's Personal Income and Outlays reports, but it is very hard to make a coherent story out of the data — which also suffers from all the usual BEA problems: seasonal adjustments and revisions, revisions and more revisions. It's really hard to "get your arms around" the data, and a half dozen conflicting inferences could be made from each new report.

When I really study the BEA tables my eyes glaze over, and I probably end up doing something that everyone does: selectively pulling data that confirms existing biases about what the data "should" be saying. For example, in the most recent report the seasonally adjusted "Real disposable personal income" was (just barely) contracting by .1% in July, after growing at a .6% rate as recently as April. In general, to my eyes the July data looked much weaker than 2nd quarter data. That is exactly what I expected to see — hence my suspicion that these kinds of reports can tell you anything you want them to say.

One thing that is less ambiguous in the data is the longer term trend in personal savings — again confirming the one (and possibly only) thing that John Maynard Keynes got right: the "Paradox of Thrift". The U.S. personal savings rate (as a % of Disposable Personal Income in the NIPA tables) was 5.9% in July, down from 6.2% in June but still above year-to-August 30, 2010 averages and likely to cause personal savings for 2010 to be at the highest rate since 1992. This is in spite of Vanguard's Prime Money Market Fund yielding 0.03% YTD, two orders of magnitude less than the rates available during the summer of 1992.

Looking back, the same savings rate was 1.4% in 2005, and 2.1% as recently as 2007. If the rate for 2010 turns out to be 5.9%, where did the extra 3.8% or more in savings come from? And can consumers continue to be frugal at that same rate? And why would they change behavior between now and November 2nd? All of the above answers probably do not bode well for third quarter GDP.

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For the most up-to-date insight into consumer behavior, visit Rick Davis's Consumer Metrics Institute.