Magazine article Economic Trends

The Ever-Updated Personal Saving Rate

Magazine article Economic Trends

The Ever-Updated Personal Saving Rate

Article excerpt

06.05.13

The Bureau of Economic Analysis (BEA) estimates that the personal saving rate for the first quarter of 2013 was 2.3 percent--a five-year low, and a substantial drop from the fourth quarter of 2012, when it stood at 5.3 percent. Since many economists think a healthy household balance sheet is a necessary condition to fuel a stronger economic recovery, should we be worried about how low this estimate of the saving rate is?

We argue that the answer to this question is no, at least not yet. Quarterly saving rates are fairly volatile, and even though the first estimate for April came in at an equally paltry 2.5 percent, we should wait to see whether such low readings are confirmed in the next few months. More importantly, though, initial estimates for the personal saving rate normally end up being substantially revised. Moreover, these revisions are overwhelmingly on the positive side; that is, the final estimates are usually a lot higher than the initial ones. How much higher? The initial estimate for the personal saving rate has averaged 4.9 percent since World War II, while the final (current) estimate is 7 percent. So when we say revisions are substantial, we are not exaggerating.

Why is the personal saving rate so hard to estimate? The BEA computes the personal saving rate as part of its National Income and Product Accounts (NIPA) and defines it as the ratio of personal savings to disposable income. Personal savings, in turn, are obtained by subtracting personal outlays (consumption expenditures, interest payments, and current transfer payments) from disposable personal income, which is personal income minus personal current taxes.

This is where things get tricky. While the BEA has a very good handle on personal outlays, disposable income is considerably harder to define and estimate. Here are its main components:

* Compensation of employees (wages and salaries plus employer contributions to pension plans and social insurance)

* Proprietors' income (the income of owners of nonincorporated businesses)

* Rental income

* Income receipts on assets (interest and dividend income)

* Current transfer receipts (from Social Security, Medicare, etc. …

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