# Misunderstanding Savings Rate: Still Negative

This evening, I read Michael Brush’s column Americans Still Have Saving Grace. He argues that "Are we really dipping into our savings for the first time since the Great Depression to keep spending? Not at all."  My problem with the main premise of the column is that his argument omits or misstates several "game changing" facts that alter the dynamics of the non-wage/income data discussion. I am compelled to clarify them.

Brush states that the savings rate is not actually negative; He quotes Ed Yardeni’s claim that "the definition of "income" excludes capital gains, and this creates a huge distortion in the savings picture."

While Yardeni is technically accurate, his statement is highly misleading, and his conclusion is erroneous. Here’s why:

According to an analysis by the non-partisan Congressional Budget Office, the richest 1% of households received 57.5% of all income from capital gains, dividends, interest and rents in 2003. That was up from 38.7% in 1991.

In other words, the "excluded" non-wage income doesn’t fall to the vast majority of households. Yes, the very same population that has a negative savings rate.

Consider the math on that: 1% of the country garnered well over half of all that non-wage income. And if memory serves, its less than 10% of Households that garner over 90% of all non-wage income (I don’t have the precise stat handy). Incidentally, if you are in the top 1% of all earners in 2003, your
wages/income ranged from \$237,000 to several billion dollars. Not too
shabby.

This is a classic error of confusing mean with the median. In a case where a small percentage of the sample is disproportionately weighted — as is non-wage income distribution — we end up with a mean and a median wildly diverging.

The classic example is a dozen cops or firemen in a bar having a beer. Bill Gates walks in for a quick one. While the "median" average income of all drinkers might be \$50,000, the "mean" average income would be about \$1 billion.

And thats why the non-income income exclusion is so irrelevant to the negative savings rate. The Cops weren’t suddenly making more money — the statistics were skewed by BillG@Microsoft.com.

As to the other comment in the column that deserves challenge — "What’s more, solid job growth and decent wage gains suggest the consumer will continue to be just fine" — let’s save that for another day . . .

>

Sources:
Americans Still Have Saving Grace
Michael Brush
RealMoney.com, 2/8/2006 1:07 PM EST
http://www.thestreet.com/p/rmoney/retail/10267249.html

Rich getting richer faster
MSN Money Staff, 1/30/2006
http://moneycentral.msn.com/content/invest/extra/P143548.asp

#### What's been said:

Discussions found on the web:
1. edhopper commented on Feb 9

Not to mention that much of the capital gains increase for the average consumer came from equity loans on there bubble inflated property value.

2. Michael commented on Feb 9

Hopefully, your comment will get a response on RM.

Because your posting was late last nite, it was bumped off and isn’t readily viewable today.

3. Michael commented on Feb 9

>>>”What’s more, solid job growth and decent wage gains suggest the consumer will continue to be just fine” — let’s save that for another day . . .<<< Even I know from your many articles, Barry, that job growth and wage gains have been sub-par post-recession.

4. algernon commented on Feb 9

Barry,

If you are trying to accurately measure the savings rate for the nation as a whole, why isn’t the mean actually superior to the median? The rich man’s dollar spends just like anyone else’s.

(the link to Brush’s article did not work)

5. Uncle Bob commented on Feb 9

We often hear that a great many Americans are invested in the markets but I wonder how much of that investment is in tax sheltered accounts which, while contributing to savings, is not available for spending. Savings used to be in the form of liquid assets like passbook savings and were thus both relevant and available to consumers, todays savings are largely unavailable to the average consumer.

6. Michael commented on Feb 9

Well, Michael Brush posted his reply to you, Barry, on RM:

>>>Barry, with home ownership in the 65% to 73% range, depending on the region, it’s pretty hard to argue that capital gains from the housing boom only go to 1% of the population!
See here and here.

Have you let your political views distort your perception of reality regarding the economy? It amazes me how many people on the far left, not necessarily you since I don’t know your politics, still refuse to admit there is any strength in the economy. They will be buying the top of this bull phase for sure, because politics interfered with their market thinking/economic analysis. My humble opinion. <<< As I commented earlier also, he's noting how home equity gains may not fit your 10%/90% distribution.

7. desidude commented on Feb 9

it is very obvious to a noneconomist like me? what about these pundits!

home gain is not a gain until it is sold!

I’ve seen stats indicating debt amount on homes as % of homevalue has actually increased in the past 5 years.
can some one comment?

8. Barry Ritholtz commented on Feb 9

Most are not selling their homes and enjoying the capital gains. Rather, they are engaging in cash out refinacing — converting equity to debt, and then spending it. And they are doing so against an asset whose price can change. As we saw during the 2000 crash, assets fluctuate in price, but debt is around forever.

The median and the mean are explained by the Bill Gates scenario. If 90+ percent of the population have an actual negative savings rate, but Big Bill has so much cash that he skews the entire national data so that it appears to eliminate that shortfall — yuo want to know about it.

Median shows the actual data for most people, while Mean shows the data for most numbers.

In other words, the numerical distortion of the mean does not presnet an accurate picture of most people’s situation.

9. B commented on Feb 9

I will take that comment. First off, consumer credit debt the effectively the same as thirty years ago. And it is less than half a dozen years ago. So, I could argue the consumer is smart enough to replace traditional consumer credit debt instruments with tax deductible, low interest debt. Just like companies do. Is that stupid? Irresponsible? A sign the consumer is overextended? I could see both sides. Neither one has been proven right…..yet.

Mortgage debt is indeed higher. What does that mean? Uh, more people own homes? More people are using low interest loans to improve their homes or send their kids to college? There are no other conclusions that you can draw from that data. None. Is that bad or good? Well, more people owning homes is good. Statistics show home ownership has a direct correlation to wealth accumulation. Risky mortgages may end up being bad if the economy slows and people lose their jobs or if we see significant housing deflation. That’s all you can really say. You can draw many conclusions but they might be wrong. The risk isn’t mortgage debt. The risk is a slowing economy and how bad it might get. If the economy does not tank, all of this is likely of little relevance and will pass without storm. At least for now.

You know, I saw a gentleman on TV who just bought a new house. He is in his fifties and an extremely well off individual. He bought a zero down mortgage. I’d guess he could have easily paid cash for his house and still lived the rest of his life without earning another dime. So, my point is, not just retards or those stretched are using these instruments. The financially savvy are as well.

“It’s the economy stupid.” – Bill Clinton’s election team.

10. Estragon commented on Feb 9

Seems to me that not all capital gains are created equal. To the extent that individual US shareholders are entitled to a share of corporate retained earnings, and this is reflected in the share price of those corporations, those individuals may be thought of as having saved more than has been captured in the saving/spending flow stats. Much of the cap gains flowing to the richest 1% takes forms like this. Incidentally, the rich have a dramatically lower marginal propensity to spend, so the rich man’s extra \$ of income is NOT the same as the poor man’s.

Housing gains are a horse of a different color though. First, they are only truly realized when the owner leaves the housing market permanently. Interim gains are rolled into the (now higher) cost of his next home. The higher terminal value of the home when the owner does exit permanently has the effect of reducing the lifetime cost of housing for that owner. In terms of the flow stats, real gains in housing mean spending and housing cost inflation were overstated for that owner during his tenure as a homeowner.

The main practical difference between these two types of gains though is that the first (retained corporate cashflows) is historical and can be determined (Enron notwithstanding) with some accuracy at any point in time. The second (housing gains) can only be determined when the owner exits the housing market permanently… it’s sort of a quantum kitten in the meantime.

11. miami commented on Feb 9

The US savings rate is still completely bogus.
Analysis stolen from elsewhere [some Wall St paper], amended by me:

‘Savings’ is the gov’t broad measure of DPI. DPI does NOT include capital gains [but does include losses], IRA gains, pension plans or gains, or housing gains.

I think household NW [hnw] should be used. Total US hnw is \$51 trillion, but includes RE. If, if, there is a housing bubble, we should exclude that, so financial NW, ex-RE, in the US is \$26 trillion, which includes \$5tn in cash [all according to ISI.]
That’s after deducting mortgages and cc debt, etc. Our GDP is \$12.5 tn, so just over 2x GDP has been saved by US citizens.

Now look at high-saving Japan:
They have 10.4tn in FNW. Their GDP is just over \$5tn. They have saved 2x their GDP. We save more than Japan.

The fact that a US Individual looks at cap appreciation and long-term investing as ‘savings’ penalizes the official ‘savings rate’ as based on current income and consumption.
If I quit my high-paying job to start a McDonalds in a good location, I will be deemed as not saving any money, probably dis-saving for years, even if my McD is worth a net \$2mm in 5 years.
That makes no logical sense. Leverage is a risk, but not good or bad per se, in fact, since mortgage debt is tax-advantaged, I think we would agree it is the ‘best’ debt one could have. JMHO.

12. kharris commented on Feb 9

This is one of those situation in which nomenclature really does matter. The official practice of counting earned income not spent as savings makes sense. It isn’t arbitrary. It is what grandpa meant by savings, but beyond that, it captures a particular concept that is valuable to have.

Brush is not alone in arguing that capital gains ought to be counted as savings, but there are good reasons not to do it. It confounds savings (money not spent out of current income) with changes in wealth. They are two different things, and the difference matters. There is no reason we can’t continue to make that distinction, unless one has a particular ax to grind. The argument that Brush ought to be making is that we have a low savings rate, but net wealth is rising, so things aren’t so bad. One can debate that conclusion, but the debate would be clear, not obscured by insisting that savings = changes in wealth.

It is not clear whether Brush means all capital gains, realized and unrealized. If he means realized capital gains, then the nomenclature problem remains, but the argument is stronger than if he wants to include all capital gains. Capital gains come and go. Saying that the savings rate has changed, when the share of income being spent is just the same as it was, but valuations of assets that have not traded hands have changed – that seems to eliminate an important concept from our understanding of household cash flow, without getting anything in return. We already have a measure of household wealth.

Speaking of axes to grind, we have Brush claiming that one is likely to be a lefty if one disagrees with his nomenclature, even though his nomenclature varies from that used in the official statistics. I call foul. Brush hasn’t proven his point on a positive basis, and wants to run off implying that those who disagree with him are making a normative argument. Certainly, not all of us are making a normative argument. Similarly, insisting that those who are not happy with the performance of the economy can only be making a partisan statement sounds, well, pretty much like a partisan statement. Pot calling kettle black. Maybe the pot calling the tomato black, in some cases.

Mr Brush can make the point he wants by talking about wealth, but insists instead that the rest of us change the way we talk to his liking, and accuses our host of letting politics distort his thinking? I cry foul.

13. B commented on Feb 9

Miami,
Great post. Bears fail to mention that our net worth is actually increasing at a faster rate than our debt. Thus our ability to service that debt is not in question……..UNLESS we have a terrible crisis or substantial asset deflation.

ie, While everyone moans and groans, we are more wealthy as a nation today than we were last year, the year before and the year before that. And we are more competitive globally.

I do worry about the many risks we face at this juncture of the economic cycle but the really painful scenarios are well outside of the bell curve and, therefore, low odds at happening. It is good to remain neutral and take what is given rather than develop a view which is rigid in nature.

14. D. commented on Feb 9

Huh?

Assets: homes
Debt: mortgages

The average Joe is going to take money out of his house to service his mortgage?

15. mforbes42 commented on Feb 9

The “facts” supporting the contention that we are not saving less, or even saving more than in the past lose some of their weight when I hear it coming from E. Yardini. If you remember Y2K, he was in the national potlight putting strong odds on a Y2K-based recession. What he says now sounds reasonable, but I don’t know if I really buy it. Anecdotedly, if I look at everyone around me, I’d say we probably do spend more than we earn. In particular, us younger folk (20-30 yrs. old) put so much on credit and then carry balances. Maybe one good gauge of the consumer would be historical (media revolving credit balance) divided by (median wage rate). Is this information available?

16. kharris commented on Feb 9

Forbes,

Something like what you are describing is the Fed’s household debt service ratio, a comparison of disposable income to debt service. In Q3 of last year, it hit a record at 13.75%. The folks who insist changes in wealth are changes in savings will say that is managable because wealth has risen faster. Some cautions on taking that argument at face value. It ignores inflation, it ignores population growth, and it ignores that debt service is what we pay on a periodic basis, unless we are lucky enough to be able to pay off all of our debt at once.

As others here have noted, the wealth held by many households is not particularly liquid. The balance they face is not changes in debt vs changes in asset value, but rather monthly debt services payments out of monthly disposable income.

17. bubble toes commented on Feb 9

so why hasn’t any of this bitten us on the butt yet?

This is a theory, that people aren’t saving anymore (we don’t know it), and the fear is, they aren’t saving, and they are in debt, and soon, we will all go under.

what evidence do we have of the impending doom?

18. Idaho_Spud commented on Feb 9

If you don’t like what the metric says, use a different one. This metric has been the same since the great depression and now it’s showing the same readings.

People had *awesome* net worth in the roaring twenties too. Big deal.

19. Greg commented on Feb 9

Hey Barry- FYI, I sent Michael Brush @RM this comment:
“Mr. Ritholz and I use “earnings” in ways that are defined by the BLS, the IRS, Wikipedia, and graduate schools of economics throughout the U.S.

It *is* possible to have *nominal* net worth go up while real earnings (~ personal income, see BLS) from decline. Or can everyone’s “earnings” go to the sky if we stop all activity except for tulip-bulb trading?

Perhaps you could provide an alternative definition of earnings, and sources?

20. Greg commented on Feb 9

There is an excellent discussion of household savings trends this month at
xxhttp://www.contraryinvestor.com/mo.htm

21. alan commented on Feb 10

The problem with using home equity as savings is that for a great many Americans, they don’t really own their homes, the people of China, Japan, Taiwan, Europe, et al do. And through the grace of God, the kindness of strangers, and the US dollar as the world’s reserve currency, this “house” of cards has recently been reinforced with super glue.

22. B commented on Feb 10

So when do you think God’s grace will run out? I’d like to be presentable when he shows up at my door.

23. miami commented on Feb 10

To those of you still complaining that home equity is solely responsible for the net worth increase, or the increase in ‘projected savings,’ it ain’t, pls see my post above. US HNW contains over \$5trillion in cash. We save more than Japan, so if we’re going to implode from here, they are going to implode even worse from here.
Secondly, and hilariously, people were not *awesomely* rich, net of debts, during the roaring twenties, they were heavily levered, much more so than today, back then you could borrow 90% of a stock’s price. 90%!
Thirdly, those who defend the current definition of ‘savings rate’ never explain why realized capital losses should be included, as they are, but not realized capital gains. Any of you want to take that one?

Finally, kharris above makes a basic error in his analysis. Inflation is *good* for the debtor. You can’t have it both ways, sir. Either the additional debts are bad, OR inflation will whittle them away and consumers will have gotten houses on the cheap with smaller than expected mortgage payments [real] for the next 30 years. You are the one ignoring the effect of inflation on debt service, curiously only applying it to one’s assets. That obviously skews the outcome.

24. alan commented on Feb 10

It sounds like Mr Miami has a vested interest- protecting his real estate nest egg in the sunshine state. There is a real difference between the roaring 20’s and now. The concentration of wealth in the US today is far worse than in the 20’s, but now with technology, we have supremely better financial engineers, or as Mr Greenspan would say: we are much better at managing debt.

25. B commented on Feb 10

You know, I like this thread because I finally have someone -miami- who takes an alternative view of doom and gloom on my side. Plus, I’m bored. Something I deal with often being I have an overactive imagination.

And God knows we all love validation. Bulls want to hang with bulls, bears with bears and the like. Because no one, especially men, want to have any one question them. We always have to be right. Rigid thinkers make awful investors. And that’s all I really care about in the end. The rest is just fun.

So, since Miami has alot of stats at his/her fingertips, I’d like to do a little arithmetic here. So, just for grins and giggles, I’d like to know how much net wealth our country has in total. Corporate, government and individual. Included in government calculations, it would be any assets they hold. Real estate, national parks, whatever. Does anyone have that? Then comparatively, how does the rest of the world stack up. I would estimate it to be well in excess of a hundred trillion dollars. Maybe alot more.

Then, what are our future obligations and what is our ability to repay it. Yes we have an astronomical government debt but if we get it under control, and we likely will because crisis creates change, are we all expecting death by bunga bunga. You know, I did a little math and figured out with 2% growth in tax receipts, the Federal government alone will bring in over \$200 trillion in the next fifty years. What’s our national debt? \$8 trillion? Fix national healthcare and roll medicare/medicaid into it and get spending reigned in somewhat and what are our problems? SS? Maybe not. I hear this quote all of the time that it used to be 100 Americans supporting one person in SS and now it is 3 or 2 or whatever. Who cares? What relevance is that? What matters is productivity and our future ability to wring more per worker. If one worker can create \$100 billion in GDP, he can support millions of retirees.

I guess my point with all of this rambling is that this is the time in the cycle for a possible correction in the markets but is the world really coming to an end? Are we really going to experience all of the doom the bears expect? Or just a mid-cycle slow down? Yes, there are problems. And alot of them. But are they any worse than they were at other times in our history? Is America really going broke? Especially to the friggin Chinese? Oh come on. Excuse me but I feel like screaming. The freakin Chinese are broke. BROKE! They have nonperforming loans propping up their economy at a rate of possibly 70+%. Those are government backed loans. And we have fiscal problems? Wait until unrest in China develops when they get a slow down as the majority of the country still live in squalor. Then you can say crisis. Big crisis. We no love you long time. The commies will be in deep shit.

Expect a slow down. Expect some possible minor asset depreciation. Maybe some higher bankruptcies as usually happens this time in the cycle. Expect higher rates over the long run with lower stock market returns likely becoming the norm but fuggedabout America losing its dominant social, economic and political position in the world. And for God’s sake, would all the bears quit complaining that America is going broke.

26. alan commented on Feb 10

Puleeze “B”, plead your case to Mssrs. Warren Buffet, Paul Volcker, and John Templeton. And puleeze for your sake, wear earplugs.

27. B commented on Feb 10

Warren Buffett….the same guy that took a drilling betting against the dollar when the Fed was raising rates? Can you say that is about the most stupid investment I have ever heard of? Soros sure as hell wasn’t in that trade. The same guy who said in March of 03 that he saw no compelling value in the US equities market and the NAS was up 70% or whatever it was in the following nine months? Buffett was good at turning alot of money into a sh*t load of money by buying undervalued assets. I give him his due. He is a great value investor. Paul Volcker, who has predicted no such demise of America but said we need to get our government spending in order? If you know something about Volcker that I haven’t read, post it. And where are Templeton’s quotes about America’s demise? America’s relegation to third world status? Might you post the link? Then show me his historical ability to predict market futures as well as my dear market timer, Buffett.

Don’t get me wrong. I really respect all three for what they are good at. Alot. But I am aware of none of them being bearish on America’s future. In fact, why has Buffett invested so much this year if he was? Invested in America. Yes he says he has alot of cash but he also put alot to work.

I suspect I know the kind of investor you are. To afraid of the doom you’ve built up in your mind to believe the market could ever run. Come on! You are an American and you can see nothing good about our society? You have no faith in your fellow man? I don’t want you in my fox hole guarding my back. You only see us all as challenged compared to the enlightened you? If only we were all as smart as you, we wouldn’t have this problem? Those who are so gloom and doom are really stating that with their thesis. Everyone else is an idiot. Because you are indicting us all with your picture of doom. Are you ever bullish on America? Not the equities markets. America.

Dislocations can last for decades. And can fix themselves without crisis. In fact, most do. Where can we pick you a new home? Would you rather live in China? Those who are, “By the grace of God” paying for my stupidity?

Help fix what you don’t like. Hold your politician’s feet to the fire and smile. You are still alive. lol.

28. Idaho_Spud commented on Feb 10

There’s nothing wrong with playing iceberg spotter on the Titanic – especially when your butt is on the line along with the clueless/reckless captain’s

It’s healthy, wise, and intelligent to have a great deal of suspicion of people (Wall St. cheerleaders) who have an agenda for *my* money. If they choose to ignore icebergs, that’s their problem. I’m gonna hang out near the lifeboats for a little while.

http://www.usagold.com/gildedopinion/prognost.html
http://home.att.net/~Resurgence/Timeline.htm

29. B commented on Feb 10

Spud man,
I won’t listen to anything written on a gold site. The traditional gold investor is a doom and gloomer. They are about as right as Prechter with his compounded annual return of -27% for fifteen years.

They got their day in the sun with the mojo players riding gold to great highs but they waited nearly thirty years.

I don’t listen to the rah rah cheerleaders but more importantly, I seldom ever listen to the gloom and doomers. Both get their day of punishment quite regularly. I watch the markets. Markets speak wonders and I don’t need commentary or gibberish from “experts” on either side. And I beat the slooow money regularly.

Stock markets go up and down. I think we are going down. But America is not going to fall apart.

30. Idaho_Spud commented on Feb 10

Aw it’s all in good fun… the gold site plots the dow and quotes the sunshine statements of the “wise financial men” right through the crash and the great depression.

They’re just like Kudlow, even as the icy waters hits their testicles.

31. miami commented on Feb 13

It sounds like Alan has no discernable argument, so he resorts to accusatory posts with no basis in fact, as he neither denies my obvious proclamation that inflation is good for debtors, nor the liquidity position that US households have, nor the far less use of margin than in the roaring twenties.. Shame.
I live in the NE, and I rent, because housing prices in my area are, imho, inflated, ftr.
In addition, I am in favor of removing the tax deduction for mortgages [say over \$50k]

32. alan commented on Feb 15

To Miami: Puleeze accept my apology, but at least I got your gender right since I called you Mr Miami w/o objections. And may you as a renter become a homeowner at some opportune time. And to “B”, relax and puleeze read Mssrs. Buffet’s and Volcker’s, and Sir John Templeton’s take on the economy. They are on the internet: a nation of sharecroppers, possible third world financial status, and gold and house prices crashing.

33. Ryan commented on Sep 22

Well, despite the arguements I think everyone can agree when I say that the rich are getting richer and the poor are getting poorer. By the looks of the stats it would seem that it is happening at an very alarming rate too!

Ryan

34. god commented on May 22

Market, economy and retail stocks have grown a lot since this debate. So who was right about the savings rate 1 year plus ago?

~~~
BR: Your comment fails to address — or purposefully ignores — what the topic at hand was here: This was an economic discussion of the claim that the U.S. personal savings rate was either (a) better than reported; or 2) Didn’t matter all that much anyway.

The economy has decelerated. It was growing at 5% GDP three years ago when the Fed had rates at 1%. Now, we are growing at around 1%. That’s recessionary in real terms, as mere population growth alone should tack on 1.5% to the GDP.

Retail stocks have been a mixed bag — high end Luxe retailers have done well (Coach, Nordstroms, Tiffany); more middle class retailers (Federated, Limited, Lowes, Home Depot) have had a mixed to weak track record, and the discounters (Wal-Mart, Sears, Target) have fared even worse.

US Markets have fared better — but compared to the overseas bourses, the US markets are lagging poorly, and underperforming Europe and Asia.

~~~
NOTE: For future reference, unless you include a real name and email address, you won’t get question answered. Further, I have been increasingly unpublishing the anon/no email address comments …

Have some cojones and step up to the plate!

35. god commented on Oct 6

No BR. The comment you deleted was exactly on target. It addressed the bigger picture which included the fact that YOU were arguing at the time that, given your misperception of the savings rate being “negative,” a 10% -20% correction in stocks was coming and it was time to be short. All your clients lost BIG TIME if they shorted on your advice because the stock market has advanced enormously since then. Come on man!! Have some cojones and step up to the plate and admit you were wrong yet once again on your market call back then! Go on and show me your lack of cojones by deleting ths responce and an accurate revelation of your poor record!