June 04, 2024
It has been popular for people commenting on the state of the economy to say that consumers have to pull back on consumption because they have exhausted their savings. A big part of this story is that the saving rate is supposedly near a record low.
The reported saving rate, at 3.8 percent in the first quarter, is in fact very low, But treating this as a good measure of savings misunderstands the National Income and Product Accounts.
The first point to understand is how saving is measured. The saving rate does not measure money put into a savings account; it is simply a residual. The Commerce Department estimates disposable income, and then subtracts consumption. What is left is “savings.”
This definition is important to keep in mind if we are trying to get the story right. In recent quarters, we have had an unusually large and positive “statistical discrepancy” in the GDP accounts. The statistical discrepancy is the gap between GDP measured on the output side and the income side.
In principle, we can measure GDP by adding up the value of everything sold, whether as consumption items, investment, government purchases, or net exports. We can also measure GDP by adding up the income generated in the production process, wages, profits, interest, and rent.
We should get the same number either way, but in a $28 trillion economy the sums never come out exactly equal. In recent quarters the output side has been considerably larger than the income side. In the first quarter, the output side measure was 2.2 percent higher than the income side measure.
At this point, we don’t know which measure is closer to the true number, but for calculating the saving rate, it doesn’t matter. Either way, the saving rate has been substantially understated.
Suppose that the income side is correct, and output has been overstated by 2.2 percentage points. This means that the output components of GDP have been overstated, which means that consumption, which is more than 70 percent of GDP, has been overstated. If consumption has been overstated by 2.2 percent, then saving has been understated by roughly 2.2 percentage points. That would mean the true saving rate would be close to 6.0 percent.
Let’s assume the opposite; that the output side number is closer to the true number. In that case income is roughly 2.2 percent higher than currently reported. In that case, since consumption is unchanged, but disposable income is 2.2 percent higher, then the saving rate would again be roughly 2.2 percentage points higher, again putting it close to 6.0 percent.
The true number for GDP is likely somewhere in the middle, but the exact point doesn’t matter. The true saving rate is roughly 2.2 percentage points higher than the reported saving rate. That puts it equal to the 5.9 percent saving rate in the three years before the pandemic.
In short, when someone tells you that the saving rate is near a record low, they are telling you that they don’t understand the national accounts. They are not actually telling you about the saving rate.
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