US national savings rate hits new low

Net national savings fell to -3.9 percent of national income, the lowest since the Depression. Usually the rate rises during a recovery.

Photo illustration/Newscom
Net national savings reached a new post-Depression low last quarter, according to a new Federal Reserve report.

Most economists focused their analysis of yesterday's U.S. flow of funds report on the "balance sheet" part of it. While that is indeed an important part, it is not the only important part. And this particular quarter not much changed in that part, with household assets rising relatively moderately, and with debts being roughly unchanged.

More interesting was the news which is supposed to be first published during GDP reports, but that this quarter was first published in the "flows" part of the Flow of funds report. I am referring to corporate profits and national income and the national savings rate.

Corporate profits increased quite a lot, by $100 billion to $1458.9 billion (these numbers are annualized, as are the numbers below). However, most of that was for the companies eaten up by higher tax payments.

Most other components of national income also increased, but as the biggest component, compensation of employees fell even in nominal terms (and even more in real terms), total nominal national income increased only 5% at an annualized rate, less than the 6.3% increase in nominal GDP. Adjusted for the increase in the domestic price deflator, this implies an increase in real national income of 3% at an annual rate, versus 4.3% for GDP.

Since these two should increase roughly the same (exactly the same in fact after adjusting for net factor income from abroad and capital consumption), this means that the statistical discrepancy reached a new all time high, with GDP being $386.6 billion or roughly 2.7% higher than what you would conclude from income based sources. By contrast, in 2006, GDP was $220.6 billion or roughly 1.6% lower than what you would conclude from income based sources.

When two numbers that should be equal aren't, it is usually difficult to say which one is closer to the truth, but generally the truth lies somewhere in between. The implication of this is that the recession was likely deeper than what the GDP number suggested, while the recovery has been weaker than what the GDP numbers suggest.

Another interesting data point is that national savings reached a new post-Depression low. Gross national savings was only $1370.2 billion (or 11.0% of national income) while net national savings was -485.6 billion (-3.9% of national income). Usually the national savings rate is pro-cyclical (increases during booms, decreases during slumps), but during the current recovery it has continued to fall. This is in part the result of the large and increasing budget deficit, and in part the result of a decline in household savings due to low interest rates and rising asset prices.

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