Corporate credit finance guarantee no personal

The personal saving rate in the United States fell to virtually zero in the second half of 1998, and, in early 1999, it has been negative. The last time the saving rate was negative was in 1933. These results have evoked two sorts of concerns: (1) the country is being profligate in its spending on current consumption and will be unable to finance adequate investment; (2) consumers may have nearly exhausted their spending power and are headed for a retrenchment. Such a development could threaten the current economic expansion.

Personal Saving Has Declined Sharply

The conventional measure of personal saving is presented as part of the National Income and Product Accounts (NIPAs). The familiar calculation is that taxes (personal tax and nontax payments) are deducted from personal income to reach disposable personal income. Then outlays - mainly consumption expenditures but also interest paid by persons and personal transfer payments to the rest of the world - are deducted from disposable income to reach saving; the personal saving rate is saving divided by disposable personal income. The pattern in recent years has been a steady decline [ILLUSTRATION FOR FIGURE 1 OMITTED]; the preliminary data for the first quarter show a negative reading of 0.5 percent.

Traditional Measurement Questions Arise

It has long been recognized that computing saving in the manner done in the NIPAs opens the possibility of substantial errors: As the difference between two large quantities, disposable income and personal outlays, a relatively small error in either will be a large error in saving. Moreover, a host of source data and statistical techniques are used to compute income and consumption. Deficiency in any of the underlying sources can give rise to error in the aggregate. It may be hoped, of course, that errors will tend to offset - either within the calculation of income or consumption or between the two aggregates - but there is no guarantee that will happen.

One particular source of potential error is imputations that are used to estimate magnitudes that cannot be directly observed. These indirect ways of estimating several key components are sizable in aggregate: In GDP for 1997, imputations in total were $1,059.7 billion, or 13.1 percent of current dollar GDP. With respect to the items that enter the saving calculation, 11.2 percent of disposable personal income and 9.9 percent of personal outlays were imputed in 1997. Again, any error in these calculations could have a meaningful effect on the saving level. A number of the imputations concern the expenditures and income generated by owner-occupied housing - always a thorny issue. In the case of housing, however, it is helpful that a number of these imputations appear in both income and outlays; thus they are offsetting when the latter is subtracted from the former.

Stock Market-Related Measurement Issues Have Become Prominent

The rising stock market and a number of conventions related to the impact of capital gains have also affected the saving rate. In recent years they have all worked to lower measured saving.

In the July 1998 revisions to the NIPAs, the Bureau of Economic Analysis changed the way mutual fund distributions are counted. In the past, all such payouts had been treated as dividends and hence included in personal income. But in fact, some of them are capital gains, which are not supposed to be included in the NIPA data. Removing mutual fund capital gains reduces income, saving, and the saving rate, the latter by about 1.5 percent in 1997.

Capital gains from any source are not included in income, because they represent a revaluation of assets rather than income generated from current production. But among the tax liabilities that are deducted from personal income to arrive at disposable personal income, levies on capital gains are included. So in a strong stock market, such as we have recently experienced, more capital gains are being realized, which boosts tax liability. Yet no benefit is being recognized in the income numbers, so the consequence is a reduction in measured saving.

Corporate contributions to pension funds and profit-sharing are counted in personal income, even though funds are not immediately available to consumers. As stock prices have risen, pension plans have become fully funded (or overfunded), and corporations have either reduced their contributions or kept them unchanged. As a result, the component of income that includes pension contributions (other labor income, pension and profit-sharing) slowed sharply in 1995, actually declined in 1996, and then advanced more slowly than overall personal income in 1997. Even though pension assets benefited, the saving rate was reduced.

Although the total impact of higher stock prices on capital gains taxes and corporate pension contributions cannot be calculated precisely, it appears that they presently depress the measured saving rate by somewhere in the 1 to 2 percent range. Adding in the change in the handling of mutual fund distributions brings the total of these direct stock market-related impacts to 2.5 to 3.5 percent.

Other Measures Show A Declining Trend

Even if we were to adjust personal saving to the former treatment of mutual fund payments and to remove the direct impact of higher stock prices, the trend would still be downward, and the current saving rate would be low by historical standards. This conclusion is confirmed by the alternative data in the Flow of Funds (FOF) Accounts constructed by the Federal Reserve. Two types of FOF personal saving measures are available, and they are compared with the NIPA measure in Figure 1.

The way personal saving is measured in the FOF accounts is to track what is done with the funds that are not used for personal consumption expenditures. Such funds can be used to acquire financial assets or to invest in tangible assets (such as housing or consumer durables); because funds for such purposes can be obtained either by saving or borrowing, to isolate the portion that comes from saving, any net increase in liabilities must be deducted. Thus, FOF saving is computed as the sum of the net acquisition of financial assets and net investment in tangible assets less the change in liabilities; dividing by disposable personal income transforms the figures to a saving rate. The segment of the economy being measured here is households, (nonfarm) noncorporate business, and farm business; the latter two components would immediately make this measure different from the usual NIPA figure, which just covers households. Nevertheless, the trend is still very. much the same in the two measures: The personal saving rate with both the NIPA and the FOF concepts and data show sharp decreases since the early 1980s, even though the latter figure has remained well above zero [ILLUSTRATION FOR FIGURE 1 OMITTED]. In 1998, the last full year for which data are available, the NIPA saving rate was 0.5 percent and the FOF measure was 6.2 percent.

As noted above, the segment of the economy is somewhat different in the two saving measures, but there is also a difference in concept. First, the FOF measure counts net investment in consumer durables as saving (or equivalently, treats only the economic depreciation in the stock as consumption), while the NIPA measure treats current outlays on durable goods as consumption (with no saving involved at all). The net investment in consumer durables can be removed from the FOF figure to make it comparable with the NIPA data. Second, one of the financial assets acquired in FOF is the insurance and pension reserves held for government employees; this is different from the treatment in the NIPAs and can also be removed. When corrections for consumer durables and government insurance/pension reserves (and a very small item for net saving by farm corporations) are made, the FOF data are converted to the NIPA concept of saving; a similar saving rate is then found by dividing by disposable personal income. With the same concept, but different data, the declining trend in the saving rate is very' clear, and the two measures are quite close in recent years ([ILLUSTRATION FOR FIGURE 1 OMITTED] again); the NIPA measure was 0.5 percent in 1998 while the FOF data using NIPA definitions came in at 1.3 percent.

All of the saving concepts and measures we have examined so far have one clear pattern in common. After being relatively stable through the 1960s and 1970s, a declining trend emerged during the 1980s. In the 1990s the downturn intensified and brought these saving-rate measures to very low - and even (in early 1999) negative - readings. The concepts and data differ somewhat, but the trend does not.

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