The saving rate has risen, surprise, surprise, surprise. The housing wealth effect is one of the most well-known phenomena in economics. The basic point is that people will spend more as a result of their housing wealth. Estimates of the size of the effect vary, but most are in the range of 5-7 percent, meaning that people will spend 5-7 cents each year out of every dollar of housing wealth.. Because of this wealth effect, it is not surprising that the saving rate has now risen from below zero to above 6.0 percent. (The actual increase is even greater due to some measurement issues resulting from the statistical discrepancy in the National Income and Products Accounts.) The loss of more than $6 trillion in housing wealth implies a cutback in annual consumption on the order of $300 billion to $420 billion (3.0-4.2 percentage points of disposable income). With stock wealth also falling about $8 trillion (the stock wealth effect is estimated at 3-4 cents on the dollar), it would have been shocking if saving had not increased. Nonetheless, the media continue to report it with surprise and suggest that a turnaround is imminent, even though housing wealth is still falling at the rate of $400 billion a month. For example, the Post attributes a statement to economist Mark Zandi about more affluent homeowners: "He says they have gotten 'their savings rate where they want it' and could resume spending soon." Of course, if they keep their saving rate where they want it, they won't start spending, they will continue saving at the same rate. (Most likely the Post misrepresented Zandi's comment.)
--Dean Baker
