Friday, August 3, 2018

Saving rate doubles

The BEA just revised the personal saving rate, and doubled it.

Source: Wall Street Journal

To commenters bemoaning the low and declining personal saving rate

I found the graph in Greg Ip's column in the Wall Street Journal, but updates seem not to show it. Greg ties it to the business cycle:
Previously, it looked like much of last year’s acceleration in consumer spending came by dipping deeper into savings, a sign of an expansion in its later stages. The Bureau of Economic Analysis has since found wages and self-employed income were much higher than it first estimated, so the saving rate, instead of sliding to around 3%, stands at 6.8%—in line with its average since 2012. The expansion now looks middle-aged (albeit late middle-age) rather than old.
Personal saving is one of the less well defined and measured concepts in economics. Is housing equity included? Is the value of employer pension plans included? (What if those pensions are massively underfunded?) If you own stock, but the company invests out of retained earnings, giving you a capital gain, is that included?  (Economically it's the same as paying profits as income, then issuing new stock to finance investment, which would show up as your saving. But we'd pay a lot of taxes, which is why most corporate investment is financed out of retained earnings.)  

The definition should conform to the question. If you want to know whether Americans are prepared for retirement, then the average saving rate doesn't really matter, and you should include social security and medicare. If you're worried about debt buildup, then you're worried about some households saving too little and others saving too much, not the average. If you want to think about the trade balance and capital formation, then you want the national saving rate and don't include social security. And so forth. 

Economic policy is also schizophrenic about saving. Half of the time hands are wrung that Americans don't save enough. The other half -- or really all the time -- policy pundits want Americans to consume more in the name of stimulus, meaning save less, or worry about "savings gluts" driving asset price "bubbles" or "secular stagnation."  

I couldn't find the BEA's explanation of what changed. It's something to do with finding more income among self-employed people, and I guess more income - the same consumption = more saving. But where was that income before? If blog readers know where the BEA explains the change in methodology or can comment directly, send a comment or an email.


A correspondent sends this, which I have not had a chance to check out

Here are some links that might interest you, one by Seeking Alpha and one by Barron’s:

The upshot is this (from the Seeking Alpha article):
“Last week, in tandem with benchmark GDP revisions, the Bureau of Economic Analysis (BEA) forewarned us of another wholesale recomputing of the savings rate. Based on new data made available by the IRS' National Research Program, the BEA has raised its income estimates to "correct for the effects of taxpayer underreporting." How the IRS has decided taxpayers are "underreporting" isn't clear (audits?), regardless there is more income than previously believed and reported in the national accounts.”

Thus, the saving rate changed because the IRS made an adjustment, and thus the BEA made an adjustment.


  1. I believe new methodology is explained here: under "Measures of the implicit services of savings institutions and credit unions".

    1. That's helpful, but I don't see an explanation why the saving rate doubled. Am I missing it?

  2. “Revisions to nonfarm proprietors’ income for 2007-2017 primarily reflect revisions to estimates of underreported income. Estimates of underreported income for nonfarm proprietors are revised based on newly available Internal Revenue Service (IRS) tax gap data, which is a component of the IRS’ National Research Program. These adjustments to IRS source data are designed to correct for the effects of taxpayer underreporting. Table 7.14 shows the adjustment for misreporting on income tax returns. Revisions to personal dividend income in 2016 and 2017 primarily reflect the incorporation of newly available IRS Statistics of Income data”

    I believe these are the specific adjustments:

  3. This month my personal savings account earned 2%, last year it earned 1%, that's double the rate . simple logic

  4. Here's one explanation I found: "Sole-proprietor and partnership income from 2012 to 2017 was significantly higher than originally published because of misreporting on income-tax forms. Spending, however, wasn’t revised up along with the increased income, which is why the saving rate moved higher." From

  5. While the household savings rate increased, it is useful to remember that the total financial savings of the household, business, government and external sectors will always equal zero (at initial face values). Individual savings decisions can not impact the overall level of financial savings - which, as noted, will always equal zero.
    If this seems strange to you!, recall that all spending = all income. If financial savings = income minus spending - then obviously savings are zero. This relationship can also be understood by noting that every new financial asset has a corresponding new financial liability. Hence, by necessity the net is zero. Interesting.

  6. Years back some economists noted that payments to insurance companies are not regarded as savings, even though premiums are paid into a large pool which is invested.

    I think this problem of measuring savings in regards to insurance still exists .

  7. "Personal saving is one of the less well defined and measured concepts in economics." Amen to that. It may even be one of the least relevant in terms of accessing the impact of policy changes with respect to long-term growth. National savings which should be measure as net national income minus consumption and government purchases is more useful. If nothing in BEA's measure of these three variables changes, the national savings rate has not changed.

  8. I believe the obsession with savings rate is misplaced, both for cyclical stage analysis, but also, importantly, as a source of concern as to what will fuel investment. Folks seem to forget that there is always money available to fund investments, regardless of the "savings rate" or the percentage of GDP which is not spent. What do you think happens to money spent/consumed. Is it shoveled into a furnace? Of course not. It sits in a bank ready to be spent again or invested depending on market demand.


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