No, the savings rate is not near a record high – OpEd – Eurasia Review

It is common for commentators on the state of the economy to say that consumers must give up consuming because they have exhausted their savings. A big part of this story is that the savings rate is believed to be near a record high.

The reported savings rate, at 3.8 percent in the first quarter, is actually very low. But treating this as a good measure of saving misunderstands the national income and product accounts.

The first point to understand is how savings are measured. The savings rate does not measure money placed in a savings account; it is simply a residue. The Commerce Department estimates disposable income and then subtracts consumption. What remains are “savings”.

It is important to keep this definition in mind if we are trying to tell the story correctly. Over the past few quarters, we have seen an unusually large and positive “statistical gap” in the GDP accounts. The statistical gap is the difference between GDP measured on the production side and the income side.

In principle, we can measure GDP by adding up the value of everything that is sold, whether consumer items, investments, government purchases, or net exports. We can also measure GDP by adding up the income generated by the production process, wages, profits, interest and rents.

Either way we should get the same number, but in a $28 trillion economy the sums are never exactly equal. In recent quarters, production has been significantly larger than revenue. In the first quarter, the output measure was 2.2% higher than the income measure.

At this point we don't know which measure is closer to the real number, but for calculating the savings rate it doesn't matter. Regardless, the savings rate has been significantly underestimated.

Let's assume that the income aspect is correct and that output has been overestimated by 2.2 percentage points. This means that the production components of GDP have been overestimated, which means that consumption, which represents more than 70 percent of GDP, has been overestimated. If consumption was overestimated by 2.2 percent, then saving was underestimated by about 2.2 percentage points. This would mean the real savings rate would be close to 6.0 percent.

Suppose the opposite; that the number on the output side is closer to the real number. In this case, income is approximately 2.2 percent higher than currently reported. In this case, since consumption remains unchanged, but disposable income is 2.2 percent higher, the savings rate would again be about 2.2 percentage points higher, bringing it closer to 6.0 percent.

The actual GDP figure probably lies somewhere in between, but the exact point doesn't matter. The real savings rate is about 2.2 percentage points higher than the reported savings rate. This places it at the 5.9% savings rate recorded in the three years before the pandemic.

In short, when someone tells you that the savings rate is near a record high, they are telling you that they don't understand the national accounts. They don't actually tell you about the savings rate.