The Savings Rate --- Ignore It!

[NajdorfDefense]

Warning = Long.
The savings rate is an old, distorted measure of what Americans 'save' in an effort to keep track of spending and net worth in this country by the Fed. The news media uses it as a reliable scare tactic to make you think you/we are all going to die poor.

As a simple measure, it may seem logical that Current Salary - Expenses = Savings and should be used as such, but it leaves so much out [and has been changed multiple times] that it's really useless. 'Savings' is the gov't broad measure of DPI. DPI does not include realized or unrealized capital gains, IRA gains, ANY guaranteed pension plans or gains, or housing gains.

In addition, years and years after the fact, the gov't goes back and makes massive modifications to past data, showing the uselessness of most of the current data.

The personal savings rate is not correlated with wealth accumulation. American's net worth hit another alltime high this month. Things are not as bad as they seem.

'BEA's October 1998 revisions were significant because they shifted capital gains from personal saving to business saving. ' In 1999, the BEA made further revisions. More details available at the Bureau of Econ Analysis.
'The net effect of BEA's two revisions, however, was a continued decline in the personal saving rate. However, if we also recalculate the personal saving rate by adding the capital gains back into personal income, the personal saving rate, ... turns out to be much higher-12% in 1992 and 7.3% in 1998...'

From David Malpass, last summer:
'Personal income grew a more modest 0.5% in July from June. However, personal income for the six months through June were each revised up. As a result, personal income in July was 7.1% more than personal income in July 2005, an increase of $727 billion at an annual rate, of which $84 billion was due to the upward revision, which alone more than offset the increase in gasoline expenditures. The revisions largely reflected wage and salary income running well above the government's initial estimates, reflecting a robust labor and compensation environment. "

Yes, shockingly, the gov't is bad at measuring big things, but we are $727 billion better off income-wise than previously estimated.

'The U.S. household sector is the world's largest net creditor, with a maturity structure well positioned for rate hikes. ..We agree that the increase in energy prices subtracts some from other types of consumption. '

'In terms of household financial net worth, the U.S. has $27.6 trillion, up $1.9 trillion or 7.4% since March 2005. This measure includes mortgages and credit cards in debt but excludes houses in assets, so broader definitions would be even more favorable to the U.S.
By this measure, Japan has $9.8 trillion, the UK $3.9 trillion, Germany $3.3 trillion, and France $2.7 trillion. '

And leveraged...? 'While total household liabilities rose $1.3 trillion in the four quarters through the first quarter of 2006, US households added $3.2 trillion of financial assets and $2.8 trillion of housing assets. That's $4.7 trillion more in net assets.

' Financial net worth reached $27.6 trillion in March, up $1.9 trillion or 7.4% from March 2005, a savings rate of 20.9%. Net additions to financial assets were $675 billion in the first quarter at an annual rate, and showed a savings rate of 6.2% over the past year.

Conceptually, it would be useful to think in terms of "risk-adjusted savings". This would give value to the safety of savings, not just the magnitude. For example, houses and stocks are less safe in the short term than a bank account, so they could be discounted somewhat. '
The sharp October 1998 decline in the personal saving rate was a statistical aberration and coincided with BEA's technical changes. '

In the WSJ last year, Economy.com [Moody's sub] showed how the 'official savings rate' for those under the age of 42 is negative 18%. -18%!!
So, let's say, using round numbers, that income for that group is $50k, those people are spending $9k more than they make in salary *Each and Every Year*!

Until age 42, on average. Over 20 years, say, that's $180k! [feel free to add or subtract the salary to get a different number.]
This completely fails the smell test. Savings rate is badly flawed for all of the well-known reasons, but this makes it sound even more ludicrous.

The 'official' rate may measure something, but it sure doesn't measure a person's real savings since it excludes all market and housing gains, investment and franchise gains, and also started to exclude mutual fund distributions some years ago.

According to the Fed: 'In constructing the NIPA, the U.S. Commerce Department's Bureau of Economic Analysis (BEA) treats consistently the flow data associated with current production. As a result, the NIPA personal saving rate gives an incomplete picture of household savings behavior. For example, the NIPA measures of income and savings exclude the sale of or change in the market value of existing assets. For financial assets, personal income does include dividend and interest income to persons, but excludes capital gains and losses. Therefore, the recent volatility in the stock market would not show up as changes in personal income and would not be included in the NIPA measure of personal saving. For nonfinancial assets of households, primarily housing and consumer durables, the NIPA includes service flows from housing as consumption, but treats expenditures and not service flows from consumer durables as consumption. Similarly, personal expenditures on education and training are treated as consumption. These accounting practices overstate consumption and understate saving.'
http://www.frbsf.org/publications/ec...el2002-09.html


I think household NW [hnw] should be used. Total US hnw is $50 trillion, but includes RE. If, if, there is a housing bubble, we should exclude that, so financial NW, ex-RE, in the US is $26 trillion. That's after deducting mortgages and cc debt.
Our GDP is $12.5 tn, so just over 2x GDP has been saved by US citizens.

Now look at high-saving Japan:
They have 10.4tn in FNW. Their GDP is just over $5tn. They have saved 2x their GDP. We save more than Japan.

The fact that a US Individual looks at cap appreciation and long-term investing as 'savings' penalizes the official 'savings rate' as based on current income and consumption.

If you quit your job to start a McDonalds, you will be deemed as not saving any money, probably dis-saving for years, even if your McD is worth $2mm in 5 years. That makes no sense.

US Household Net Worth ($ Trillions)

1985
Net Real Estate - 3.8
Stocks - 1.3
Cash/bonds - 3.8
....
Consumer Debt - [0.6]
Total 14.1 trillion


2005
Net RE - 12.6
Stocks - 10.2
C/Bonds - 8.8
...
Con Debt - [2.2]
Total $51.1 Trillion.

So, RE net of mortgage has gone from 27% of HNW down to 24.6%. Debt has gone from 4.3% to 4.31% of HNW. Not much of a housing 'bubble' in historical terms, either.

This is a classic example of how one poorly designed stat gets distorted even further in reporting by 22-yr old Columbia grads who can't balance a checkbook.

[Korch]

interesting. would you expect the US savings rate to go up if US investments begin performing poorly? Is there any such correlation historically?

[spider]

I assume the point is that from an individual's viewpoint, it is change in net worth that you care about? So, if you made 100k in wages in 2006, and spent 100k, and your assets increased by 100k, then I'd agree that the 100k in net worth is what matters, not that you saved $0 by some particular definition of savings.

But I think what some people are troubled by, and which is closely related to these things, is that on net, at a national level, we are basically selling assets in return for consumption goods (i.e. trade deficit of around $600b annually).

I don't really know if we should be concerned about that or not (as Buffet, amoung others, is), but I think it's an interesting question.

[NajdorfDefense]

[ QUOTE ]
But I think what some people are troubled by, and which is closely related to these things, is that on net, at a national level, we are basically selling assets in return for consumption goods (i.e. trade deficit of around $600b annually).

[/ QUOTE ]

Of course, they can't really point to any valid reason to be troubled by that, in fact, there are a host of reasons not to.

1) The US net debt-to-GDP ratio is better than that of the EU, Japan, Belgium, Argentina, Israel, Turkey, Greece, Canada Austria, and most other developed countries. At under 40%, [or use gross of 64%] we are below virtually all the competition, Japan's is almost double ours, etc.
According to the CEA, since 1946, US inflation-adjusted debt has grown by 84 percent, but the economy has grown by 429 percent— more than five times as fast. If these 'debt-to-GDP' arguments are for a declining USD, the facts contradict them quite severely.

2) Capital Account surplus - what you call a trade deficit, no one has EVER shown that a capital-account surplus is bad for a G-7 country. Our ratio in 2006 was the same as 2005, rounded, I think a tick lower around 5.7%. The USA is 50% of global equity outstanding and 45% of global debt. It would be impossible for US investors to own more foreign securities than vice-versa. Look at the widening trade gap of the late 90s when the USD was skyrocketing - into 2001.


The question is, is US gov't borrowing sustainable?
If global income levels continue to rise, or if growth rates continue to rise, or if the cost of borrowing stays low, or some combination of the three - it definitely is.

Now, the Current Account deficit is based on three things: domestic demand for goods/services, foreign demand, and the FX rate.
There are two ways of "fixing" that number --> Global demand can increase, or US demand can decrease. The rest of the world does NOT want US demand to decrease!

As long as US demand grows faster than global demand, by definition the C/A deficit must increase as long as I>E.

Net Foreign investment is $2.3Tn. Secondly, and more importantly, this includes equities, corp debt, and other securities that have nothing to do with the US' ability to repay our public debt. The US does NOT stand behind ETYS's stock, or HLSH' bonds.

Thirdly, this excludes direct holdings of foreign assets. Fourthly, due to many US corps relocating 'offshore,' Bermuda has a GDP of $2bn but US Investment Holdings there are $124bn!
Finally, holdings of foreign securities entrusted to nonresident institutions are tracked incorrectly according to the IMF, from their appendix.

The US is about 50% of global equity outstanding and 45% of global debt. It would be impossible for US investors to own more foreign securities than vice-versa.

The C/A deficit is simply the opposite of the capital acc't surplus. It's an accounting identity.

When foreign investors give us their money for our financial assets, [netted out] you can do one of two things with it:

1) Burn it. [not a bad idea for Yen until recently]
2) Buy their goods with it.

There is no other option.

[NajdorfDefense]

' Improved optimism about the economy reduces the need to save and...this effect may be particularly inportant in explaining the growth in consumption and debt accumulation for the wealthiest Americans.
Roger Ferguson points out that households with incomes in the top quintile have accounted for nearly the entire drop in the personal savings rate in the last 15 years with the remaining 80% continuing to save at the same rate over this period.

It is worth emphasizing the savings rate...is subject to large revisions over time...although the 1980s is now known for a high rate, preliminary data during that period show the rate near a post-Korean War low. Overall the avg savings rate from 1965-1999 has been revised up by 2.8%, from an initial estimate of 5.3% to the current calculation of 8.1%. [Nakamura and Stark]...
.....the authors found that the actual growth in non-mortgage debt was far weaker starting in 2002 than the historical trend would indicate. Indeed...real revolving debt growth [credit cards] has averaged just 0.4% over the past 4 years compared to growth of 10.0% from 1983-2000.'

Fed Res Bank of Phila, 2006.

[spider]

[ QUOTE ]
1) The US net debt-to-GDP ratio is better than that of the EU, Japan, Belgium, Argentina, Israel, Turkey, Greece, Canada Austria, and most other developed countries. At under 40%, [or use gross of 64%] we are below virtually all the competition, Japan's is almost double ours, etc.

[/ QUOTE ]

Well, I'm a little confused about these numbers, mainly to the extent I'm not sure of the exact definitions, but it seems like one of your main points is that regardless of recent flows (trade deficit or current account suplus as you prefer), the net position of the U.S. is not too bad. And assuming you know the numbers here, I'll agree that it's the net position, not just the net flows.

I think the implicit argument that many people are making about trade deficits being "bad" is that they can't go on forever at the current rates. And that may indeed be true but that doesn't necessarily mean it's bad for them to continue like this for a few more years.

A good analogy for this where I know the numbers better is simply the U.S. federal gov't debt/deficit. We will eventually be in trouble if we keep on the current path without either raising taxes or cutting spending (or cutting the explicit/implicit promises of social secutity and medicare). At the same time, we can continue like this for a few more years because the overall debt level (as a percentage of GDP) is pretty moderate. In other words, like most of our problems, we'll fix it when we have to.

Another point worth mentioning is that a lot of the net foreign investment is in things like Treasuries whereas the U.S. investments abroad tend to be in riskier/higher yield investments. So, to that extent we sort of get a free ride as long as the riskier investments out-yield treasuries, which is a safe assumption most of the time. And even when it isn't, the U.S. has the luxury of having the resources/power to ride out pretty much any financial storm, whereas that sort of tradeoff could be pretty deadly to a Thailand or Argentina.

[IronFly]

Naj,

Good points, good post, ty.