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Tuesday, January 31, 2006

Are you sure about that negative savings rate?

The reported negative savings rate in the U.S. is atleast consistent with the low and declining rate reported over the past two decades. The odd thing about the reported saving rate is that it is inconsistent with a number of other elements of economic data that look pretty good. When you look a little deeper into the matter, you learn how misleading the reported number can actually be. The financial press seems to make no attempt at understanding the matter and then informing the public. Fortunately, a very good economist, Brian Wesbury, helps us out.

We are not sure which economic “old wives tale” is the most damaging. But right up at the top of any list is the idea that the US has a negative savings rate.

Yes, it is true, that the Bureau of Economic Analysis (BEA) says that US consumers spent more than their after-tax income in 7 out of the last 8 months and through November 2005, and had a savings of negative $39 billion.

There are many reasons to discount these statistics. For example, when a car, home appliance, or computer is purchased, the entire expenditure is immediately subtracted from income, even if it is paid for over time. Spending on education also counts as consumption. But, these expenditures are investments and on a set of corporate books would be treated much differently.

The best measure of household savings is calculated by the Federal Reserve in its quarterly Flow of Funds Accounts. This data shows that US households had $62.5 trillion in assets at the end of September, $11.4 trillion in liabilities and a net worth of $51.1 trillion. This is a record level and $5 trillion more than a year earlier. Of the increase, $3.3 trillion was in financial assets, suggesting that US households are one of the best savers in the world. Contrary to popular belief, the US does not have a negative savings rate.

Thanks for the help Brian!

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