A Savings Puzzle

I am a connoisseur of statistical discrepancies—and I’ve found a big one in the savings data that I still don’t understand. This is going to be extremely wonky—you are forewarned.

We all know that the personal savings rate has stayed remarkably low, despite the slump in housing prices. In the first quarter, the BEA figures show that personal savings was a tiny 0.6% of disposable personal income, barely higher than it was in 2005-2007.

The Federal Reserve also calculates a gross household savings number, which takes personal savings and adds in investment in consumer durables and consumption of fixed capital (depreciation). This measure, too, has not risen very much. (Note: The household numbers from Table F.100 include nonprofits as well).

But here’s the thing. The Fed, in its flow of funds release, calculates a number for gross household investment. Gross household investment is the combination of household capital spending and net financial investment. That is, the amount you save can either be used on physical investment goods (a house, a car), put into a financial asset (a savings account, money market funds, stocks, or so forth), or used to pay down debts (mortgages, credit card debts).

In theory, gross household savings should equal gross household investment—but it doesn’t. In fact, gross household investment has been soaring. Take a look at this chart.

The blue line is gross household savings, the red line is gross household investment. In theory, these should be the same lines. But in fact, the statistical discrepancy—the excess of savings over investment—has swung from roughly $300 billion in 2005 to -$390 billion in the first quarter of 2008 (at annual rates).

To put it another way, even though the official savings rate is low, Americans have supposedly been funnelling massive amounts of money into financial assets. Net financial investment has gone from -741 billion in 2005 to $219 billion in the first quarter of 2008 (at annual rates). See this chart:

In other words, Americans who were borrowing heavily in 2005, 2006, and 2007 are now lending again (that’s what the shift from negative to positive means).

What are the possible explanations for this shift?

1) Just a fluke of the data—many statistical discrepancies end up being revised away as new source data comes in. So it may turn with this one as well.

2) Personal savings could be really higher than the numbers show—either because consumption is lower or because personal income is higher. There is in fact a long history of upward revisions in the personal savings numbers. If consumption is lower, then the economy might be weaker than it seems. Or if personal income is higher, it could be stronger.

3) The financial data could be mistakenly attributing investment by businesses and foreigners to American households. In fact, since the foreign financial flow data is squishy, there may be more money coming into the country, net, than the statisticians realize.

So no answer here…just questions.