The Washington Post noted the rise in the household saving rate this year in response to the loss of trillions of dollar of housing and stock wealth. In fact the increase in saving is somewhat larger than indicated in the standard data cited in the article. Saving is measured as a residual, the difference between disposable income and consumption. Disposable income is derived from a measure of total income, which includes wages, interest, profits and other forms of income. In principle, income for the economy as a whole should be equal to output. In reality, the two are never equal, with output usually being larger than income. (People may understate income because they cheat on their taxes.) The difference between the output measure and income is the statistical discrepancy. This discrepancy became negative in 2006 and 2007 (meaning that reported income was greater than output), but then became positive again in the 3rd quarter of this year. If the output data is more accurate than the income data, then we overstated income growth and therefore overstated saving from 2006 through the first quarter of this year. If we construct a saving rate based on an output side measure (adding the statistical discrepancy to income), the rise in the saving has been even larger than the official data show. Using this alternative measure, the savings rate has risen from less than -1.0 percent in 2007 to more than 3.0 percent in the second and third quarters of this year. (Data on the statistical discrepancy is not available yet for the 4th quarter.)
--Dean Baker
