The Rainy Day Fund

Every five years the Bureau of Economic Analysis (BEA) publishes revised economic data that is derived through improved survey methodologies. Sometimes the new and improved methodologies can produce dramatic revisions to economic data going back many years. Such was the case with the BEA’s latest revisions, which were released late last month. Perhaps most surprising, the new data suggests that US consumers have been saving a much greater proportion of their disposable income than had been previously estimated. Why is this important? Because consumer spending represents about 67%-68% of the US economy, and so higher savings rates can effectively be interpreted as deferred consumer spending (and therefore deferred economic growth). In layman’s terms, it means that consumers may have far more dry powder for a rainy day than previously thought. Given weak wage growth in recent decades, as well as the average consumer’s ill-preparedness for retirement, the new data is very good news.

Source: Bureau of Economic Analysis
Before we break out the bubbly, though, we should probably understand why the BEA believes its previous methodologies had led us so astray. According to a July 27 article on Bloomberg (“Americans Have Been Saving Much More Than Thought”, by Richard Miller), “Most of the revision to savings in recent years came about because small-business owners and other proprietors made more money to salt away, not because workers got bigger wage increases.” Given the long-term trend of rising economic inequality, this is a very important point. The revised savings rates are based on aggregate savings and aggregate incomes. As a result, it is very hard to determine based on the savings rates alone whether the typical American household has been able to save more than previously thought. Incidentally, as we’ve discussed in prior Market Commentaries, we run into the same problem with much of the data that is produced by the government. Using aggregates and averages simply doesn’t tell the whole story and can very often lead to incorrect conclusions about various aspects of our economy. For instance, if the lion’s share of the income and wealth gains continue to be enjoyed by a very small percentage of wealthy families, the positive effect on GDP growth is likely to be far smaller than a scenario whereby the income and wealth gains are more widely distributed to families who are more likely to spend it.

So does the new savings rate data do anything to alleviate our concerns about the financial well-being of the US consumer? At the margin, yes. It’s great that small-business owners were able to save more than we previously thought. In times of economic uncertainty, these proprietors could potentially use their savings to keep their businesses afloat and their employees employed. Under a scenario such as that, everybody wins. However, the new data still mask a major impediment to better economic growth: economic inequality. As such, it is probably far too early to conclude that the BEA’s new savings numbers will have a meaningful impact of US economic vitality.