Breitbart Business Digest: American Households Have Been Saving Much More Than We Thought

More Income Behind the Spending

Higher Income and Higher Saving Supports Strong Spending

Last week’s revisions to household financial data help solve one of the persistent mysteries of the last year: why has consumer spending been so resilient despite gloomy consumer sentiment?

Part of the answer is job security. Jobless claims, which are a proxy for layoffs, have run at their lowest year-to-date levels since 1969. The unemployment rate has been at or near the Fed’s longer-term estimate of maximum employment. We’ve added more jobs this year than needed to keep up with the growth of potential workers.

The latest data from the government point to another factor: American households have been saving substantially more than the official figures previously indicated.

The Bureau of Economic Analysis’s annual revisions raised estimated personal saving by an average of $322 billion over the 12 months through July. That is an increase of approximately 39 percent from the previously reported figures. To put it in technical economic terms, that is massive.

Previously, the official estimate for annualized saving averaged about $836 billion during those 12 months. The revised estimate is approximately $1.159 trillion. Households were retaining considerably more income after taxes and spending than the earlier accounts suggested.

The largest contribution came from higher estimates of personal income, which were revised up by an average of $367 billion. Estimated tax payments also increased, absorbing approximately $131 billion of that adjustment. Personal outlays were revised down by about $86 billion, accounting for the remainder of the increase in saving.

Strong consumption alongside a declining saving rate can suggest that households are stretching their finances to maintain spending. Higher income supporting both consumption and saving gives that spending a firmer foundation. This is not families spending down their nest egg or relying on credit cards, creating financially unstable household balance sheets.

July provides a useful illustration. Personal saving was previously estimated at $712 billion at an annual rate. It is now estimated at $1.112 trillion, an increase of $400 billion. The saving rate rose from the previously reported 3.0 percent to 4.6 percent.

Real consumer spending remained strong, rising 2.6 percent from a year earlier in August. The revised accounts therefore accommodate both substantial spending growth and a greater capacity to save.

Not All Declines Are Created Equal

It’s important to note that a decline in saving does not always mean distress. Households might be willing to spend a larger portion of their income because they become more confident in their future income and their job security. Month after month of rock-bottom jobless claims, for example, might convince Americans that they don’t have to save as much for a rainy day. That appears to be what happened this summer, when August’s saving rate was 4.1 percent, down from the revised 4.6 percent in July. Spending increased faster than disposable income that month.

The revisions, in other words, help explain why consumer spending has held up despite depressed economic sentiment. Consumers may not be subjectively happy about the economy, but the income accounts that measure the resources available to finance purchases show they have been doing well.

This is also promising for the future. It supports the contention that recent robust consumer spending is sustainable. Households are not about to run out of money because they spent down their savings. Americans have been spending from an income base larger than previously measured, while retaining more of that income than we knew.