One of the main causes of the severe downturn is the plunge in consumption that has resulted from the loss of more than $6 trillion in housing wealth. The NYT has a front page piece on this topic today. It's worth noting that the rise in the saving rate is probably even larger than the official measure. Saving is measured as a residual -- disposable income, minus consumption. However, it is likely that the measure of disposable income was inflated by capital gains showing up as income in the peak bubble years of 2005 and 2006. This lead to a large negative statistical discrepancy in the national income and product accounts, with the income side measure of GDP being $253.4 billion larger than the output measure at its peak in the second quarter of 2006. With the plunge in stock and housing prices, the relationship has reversed to the more normal situation with the output side measure being larger than the income side measure. The gap in this direction was $224.8 billion in the most recent quarter. If we assume (as most economists do) that the output side measure is the more accurate measure of GDP, then the saving rate in 2006 would have been close to -2.0 percent of disposable income whereas it would now be close to 7.0 percent of disposable income.
--Dean Baker
