Wednesday, December 21, 2005

US Savings Rate is Close to 10%

It has been widely reported that US households are spending so much - that's good, right? - that they have cut their savings rate to less that zero. Michael K Evans in Industry Week doesn't believe them. Because a respected authority says that this analysis is incorrect - Alan Greenspan in a working paper and the US Labor Deptment as well.
For example, recently the Federal Reserve Board issued an important working paper, co-authored by none other than Alan Greenspan himself. It estimates "gross equity extraction" from homes on a quarterly basis from 1990 to the present. As I read through the numbers, they suggest that the personal savings rate is about 9%, not less than zero. They are not the only numbers we can look at. The U.S. Labor Department's Bureau of Labor Statistics publishes a comprehensive consumer expenditure survey on an annual basis. The personal saving rate, calculated from that survey, increased from 3% in 2000 to a whopping 12% in 2003, the latest year for which data are available. I don't think the saving rate is that high, but the point is that the BEA measure of personal saving is far from the only measure available, and in my opinion is irrelevant.
Why the disparity? Because of different methods of looking at consumption, particularly housing.
The main difference occurs in housing. Suppose, for example, that the typical mortgage rate declined from 7% to 5%, and many homeowners refinanced. They would then spend less on their mortgage payments, which would leave more money for either other purchases or an increase in saving. Note that this development is independent of the extraction of home equity, which increases the actual cash saving rate even more. The Fed's paper has gone far to resolve the conundrum that consumers keep buying other goods and services at the same rate even when energy prices rise and even though the personal saving rate is reportedly negative. The personal saving rate is nothing of the sort. It is probably about 10% when refinancing at lower rates and extraction of home equity are taken into account.
I admit that this souce doesn't go into sufficient detail for me fully understand. But it appears that much of this is a conversion of savings in a home to cash savings by refinancing and extracting equity. But I do understand that two respected sources find the data say the news is good.
As a result, real consumer spending will grow at the same rate in 2006 as it did in 2005. BEA will continue to report that the personal saving rate continues to become even more negative, but those figures can be safely ignored.

No comments: