How does the surge in the US PCE index impact investments in Taiwan? The economic logic you must know

What Exactly Is the US PCE Measuring?

The PCE index (Personal Consumption Expenditures Index) is a core economic indicator that measures changes in American consumers’ spending on goods and services. Simply put, it tracks the activity in the wallets of the general public—the trends in their expenditures on food, clothing, housing, transportation, healthcare, and more.

Why is this indicator important? Because personal consumption expenditure typically accounts for about 70% of the US GDP and is the primary engine driving the US economy. The Federal Reserve (Fed) considers the PCE as the most important inflation indicator, using it to decide whether to adjust interest rate policies.

How Is the PCE Index Calculated? What’s the Underlying Logic?

The calculation of the PCE involves three steps: first, collecting price data for various goods and services such as food, clothing, housing, transportation, and healthcare; second, assigning different weights to these items based on their importance in consumer spending (housing has the highest weight); finally, summing these weighted price indices to derive the overall PCE value.

It may seem complex, but the core logic is simple: comparing what people are spending today versus in the past—this difference signals inflation or deflation.

The Five Major Factors Driving PCE Fluctuations

Inflation directly determines purchasing power. Rising oil prices → increased shipping costs → higher food prices → rising PCE. This chain is tightly linked. Real estate price surges also push up rent and mortgage costs, exerting significant pressure on the PCE.

Employment conditions determine income levels. Expansion in high-paying tech industries leads to increased consumption, while rising unemployment has the opposite effect.

Wage growth impacts purchasing power. Industry-wide wage increases mean workers have more cash, naturally boosting demand for goods and services.

Interest rate environment influences consumption ease. Low interest rates make borrowing cheaper, facilitating home and car purchases, thereby increasing consumption. High rates suppress credit demand.

Consumer confidence governs spending decisions. Optimistic outlooks lead to more spending; pessimistic sentiments lead to savings and caution.

A Visual Guide to the Relationship Between PCE and Economic Trends

Data shows a high correlation between the PCE index and stock markets, exchange rates, and commodity prices. For example, after the 2009 financial crisis, the PCE gradually rebounded from near 0% to about 2% in 2018, coinciding with the S&P 500’s recovery trajectory. This is not coincidence but a true reflection of economic signals.

During the COVID-19 pandemic in 2020, the PCE fell to nearly -1% annual rate in April, causing stocks in travel, retail, and other consumer sectors to drop, while e-commerce and remote work software stocks surged. Changes in PCE directly guide investment directions.

Recently, US PCE data fluctuates between 4.6% and 5.2%, with forecasted and actual values closely aligned, indicating market expectations for consumer spending are relatively accurate, reflecting stable consumer behavior and manageable economic volatility.

When Does the US Release PCE Data? Key Timing for Investors

The US PCE index is usually released on the last business day of each month or the closest business day to the end of the month, with 2:30 PM Eastern Time being the critical moment. On October 27, 2023, the data showed: September consumer spending increased by 0.7%, exceeding market expectations.

What’s behind this strong performance? Households are increasing purchases of cars and travel expenses, maintaining strong consumption momentum into Q4. Meanwhile, the core PCE price index rose 0.3% month-over-month and 3.7% year-over-year, with high service costs continuing to push inflation.

Economists generally expect that as excess savings accumulated during the pandemic are gradually depleted, the growth rate of consumer spending may slow in 2024.

How Does the Fed Use PCE to Formulate Policies? The Chain Reaction in Global Markets

PCE data above expectations → Fed tends to continue rate hikes → borrowing costs rise → corporate investment decreases, stock markets face pressure

PCE data below expectations → Fed may pause rate hikes → borrowing costs decrease → stock markets may rebound

The PCE index has the most direct impact on the US domestic market. Rising PCE indicates increased consumption, growth in manufacturing and service demand, and higher corporate revenues. Conversely, declining PCE has the opposite effect.

Why Should Taiwanese Investors Watch US PCE?

As a highly open, export-oriented economy, Taiwan’s economy is closely linked to the US. Changes in US PCE impact Taiwan through four main channels:

Exchange Rate Channel: PCE rising → US economy strengthening → US dollar appreciating. The Taiwan dollar depreciates relative to USD, making Taiwanese exports priced in USD cheaper in the short term, benefiting exports but potentially squeezing profit margins long-term.

Trade Channel: US consumption increases → higher demand for Taiwanese goods. Major exports like electronics, machinery, and textiles benefit. Conversely, a slowdown reduces export demand.

Stock Market Channel: US economic strength → inflow of international capital into emerging markets → Taiwanese stocks attract foreign investment. US recession reverses this trend.

Energy Channel: PCE rising → increased global energy demand → rising oil prices. Taiwan’s high energy import dependency means higher energy costs directly raise inflation and production costs.

In short, when US PCE surges, Taiwanese exporters benefit in the short term but may face pressure from a stronger dollar long-term; when US PCE declines, Taiwan’s exports may face headwinds.

How Should Investors Respond to PCE Fluctuations?

For Taiwan stock investors: Before and after PCE data releases, sectors like electronics, trade, and transportation related to exports will show noticeable volatility. Anticipating PCE direction allows for strategic positioning or risk mitigation.

For forex traders: Rising PCE usually boosts the US dollar, putting downward pressure on the Taiwan dollar. Pondering PCE trends can help forecast the future movement of the New Taiwan dollar.

For multinational companies: When the dollar appreciates, USD-denominated goods become more competitive; when it depreciates, import costs fall. PCE indicators can help optimize pricing strategies.

For asset allocation: Rising PCE signals inflationary pressure, suggesting reducing cash holdings and increasing real assets; declining PCE indicates potential economic soft landing, favoring defensive assets.

Summary

The PCE index is not only a tool to measure the strength of domestic demand in the US but also a global market sentiment indicator. Taiwanese investors must develop the habit of regularly tracking US PCE data and integrating it into macro analysis.

Rising PCE → US dollar appreciation → rising commodity costs → pressure on export-driven economies; declining PCE → US dollar weakening → depreciation risk for dollar assets. Understanding this logic enables precise opportunity capture amid global economic fluctuations.

Regularly monitor PCE release timings, compare actual versus forecasted values, and analyze YoY and MoM data—these seemingly tedious tasks are fundamental to formulating robust investment strategies.