Posted on 01/31/2006 7:28:58 AM PST by tellw
Despite what bearish commentators may be telling you about the health of the US economy, the notion that US consumers are spending more than they are earning after-tax is an "old wives tale" – say some economists.
The best measure of household savings in the US is the Federal Reserve’s Quarterly Flow of Funds Accounts, says Claymore’s Chief Economist, Brian Wesbury. According to this data 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", Wesbury exclaimed in a note to clients on January 2, 2006.
Of the increase, financial assets improved by $3.3 trillion suggesting that US households may be one of the best, not worse, savers in the world.
Market bears have long touted a negative savings rate statistic as a reason to be skeptical of the future health of the US economy. What are they missing, if anything?
It appears that the methodology for calculating the savings rate by some agencies like the Bureau of Economic Analysis may be flawed. For example, when a car, home or computer is purchased, the entire amount is subtracted from income, even if it is paid for over time – skewing consumption upwards.
Spending on education is also considered to be part of consumption, however education is an investment and according to Wesbury would be treated differently on a set of corporate books. Moreover, capital gains on 401K’s, IRA’s and other savings accounts including the gain on a home are excluded from income. However, taxes paid on these gains subtract from income creating what is known as a downward bias on income.
Furthermore, as the number of retirees grows, consumption funded by personal savings will continue to grow. Since savings is not part of the income calculation, this will exacerbate the perception of a negative savings rate in the US and in other places like Canada.
Wesbury also explains the difficulty government has separating business spending from personal spending because so many small and large businesses buy office supplies and construction materials at retail outlets like Office Depot, Staples, Home Depot and Lowes.
"To the extent that government counts business spending as consumption, savings will be undercounted", he said.
Finally, personal income, wages and salaries are often initially understated and then later revised upwards. Given the likelihood of a positive revision in 2005, the negative savings rate could easily be revised away.
BMO’s Deputy Chief Economist Douglas Porter says, "The savings rate has been a lousy leading indicator for consumer spending in both Canada and the U.S. in recent years. That is, just because the savings rate is low (or even negative) tells us nothing about whether spending will lose momentum or pick up speed in the year ahead. In addition, the savings rate doesn’t even help tell us if household finances are improving or deteriorating. Household net wealth is now at its highest level on record at more than 5 times disposable income in Canada, and that is in spite of a reported negative savings rate."
The bottom line is that the savings rate can be a highly misleading measure by itself, and should be treated with a great deal of caution by investors.
The next time you read or hear about a negative savings rate being used to support a pessimistic outlook for the economy – don’t be naïve. Things may not be as bad as some would have us believe.
Neil Murray is an investment advisor and financial planner with BMO Nesbitt Burns Inc. in London. Reach him at (519) 646-2313 or e-mail neil.murray@nbpcd.com.
This ranks up there with 'this bubble is different', and 'this is the new economy old princibles don't apply'.
Americans are overleveraged plain and simple.
Thank you for posting this - I took a big rash of crap saying this yesterday in a "We're Doomed!" thread on the bogus (or should I say flawed) report on the "negative savings rate.
Question: is home equity counted in with the savings rate? It makes up a big part of savings.
All they count toward savings are bank savings accounts. By that measure, I'd bet the George Soros dosen't save much either.
You just can't prove it?
Are you saying that the nice folks that put junk economic reports like this don't have an agenda?
You must have missed the increase in foreclosures and bankruptcies....
Somebody gets it ping.
$51 trillion net worth and we're still overleveraged? And this is after the dot-com meltdown.
i'm a great saver. save every penny i make. unfortunately, my chilean wife spends it all on shoes...
Well, if the savings rate was 10% throughout, then, with the compound returns of the last 30 years, everyone and his brother would be millionaires, and the society would collapse [who then would be driving a septic truck or flip hamburgers?]. Happily, this is not quite the case.
LOL. Maybe your Chilean wife considers those shoes an investment?
Would that, perhaps, be off-set by the record numbers in housing ownership/building...it's all about the "totality" of the information...careful or their hearsay will bite ya!
In your opinion.
You mean that spike just before the new bankruptcy laws were tightened? Yeah, that was a big surprise. LOL
Can you explain the household net worth numbers away? We have a net worth (that assets less liabilities, which includes all consumer debt, mortgages and home equity lines) of $51.1 trillion, which is more than double what it was in 1994. Only 21% of this wealth comes from homeowner equity. The average American homeowner has 57% equity in their home. That means we own a lot of liquid assets.
Would you like a link to the numbers?
It shouldn't be given the volatile nature of home values, especially at present.
Ignore the $51 trillion in household net worth. His cousin is unemployed and some guy at Home Depot told him the economy was in trouble. Don't ask him for a source, everybody knows it's true. /ignorance
Ask the average person which is greater:
(the value of their home - mortgage balance or their total credit card debt.
The fact that they consider appreciation in a house "savings" is ridiculous...and I suspect that the net asset number, if it includes home appreciation, will decrease markedly this year.
Then we will see who actually "owns" these homes....
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