Tuesday, August 02, 2005

Official U.S. households savings rate at zero

While today's report on personal income and spendingin June showed slightly stronger income growth and slightly lower increase in the PCE deflator than expected, another item was negative: the US household savings rate fell to 0.0% in June, the lowest since the Great Depression. Some people have argued that this measure understates the true savings rate since it does not include capital gains. This argument is actually to a limited extent correct. A correct measure of savings would apart from dividends also include the implicit dividend that exist in the form of retained earnings and because of this the true savings rate is somewhat higher than zero. But including capital gains completely would greatly overestimate savings. To the extent that a capital gains is the result of higher retained earnings it should be included, but including capital gains based on expected higher future earnings would in fact mean spending money that haven't yet been earned. And including capital gains based on asset price inflation (higher stock price relative to expected earnings) is even worse, because the gains for the sellers would be counteracted by lower purchasing power for the buyers.


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