Discover the latest news and insights from the world of capital markets strategy.

The Grinch of Christmas—Personal Saving Rates

A house is illuminated at night with festive Christmas lights, creating a warm and inviting atmosphere.

You’ve probably heard that the personal saving rate in America keeps falling. This statement might be true for government reports, but it’s inaccurate. According to the US Bureau of Economic Analysis, the official US saving rate is lower now than it has been for most of the last 60 years. The weird thing is that US household net worth continues to climb steadily. That begs the question, how can the US collectively be getting wealthier if they spend all their money?

The problem with the official US saving rate is that it’s government data, which often makes it worthless. No joke, it is an assumption based on myriad assumptions, which is dirty data in my book. To calculate the personal savings rate, the Commerce Department compares after-tax income to personal consumption expenditures (outlays). This process may sound intuitive, but its methodology understates income and ignores how most people save. For example, the methodology does NOT count capital gains as income or savings, even though you pay taxes on the growth. In an even more confusing twist, the BEA subtracts the capital gains figure from the savings total. Furthermore, the personal savings calculation does not measure cash flow from many investments (IRAs, 401(k)s, etc.).

The most inexplicable calculation I will highlight deals with real estate and mortgage payments. Many homeowners view their house as a nest egg and build up equity by making extra mortgage payments. Understandably, these additional principal payments are not a clearcut way to save because a house is illiquid (i.e., hard to sell quickly). However, classifying mortgage payments fully as spending is inaccurate because a portion of each payment builds equity on the owner’s balance sheet. That said, I don’t have enough space in this article to go through all the statistical wackiness with the mortgage payment calculation. However, I will highlight one significant issue: Owner’s Imputed Rent.

The US Federal Government believes that if you’re a homeowner with no mortgage, they will decide what your home is worth and what you would need to pay if you rented “your” house on the open market. The fabricated rental value then gets debited from the personal savings rate—this massive amount accounts for more than $2 trillion of “negative” savings annually. For comparison, US tenants only shelled out about $600 billion in rent. This figure is far less than the made-up number used in the calculations. If the US Government wiped out the made-up $2 trillion and only utilized the actual $600 billion rent figure, the official saving rate would go from 3.8 percent of GDP to more than 11 percent!

Understandably, the peculiarities in calculating the official savings rate understate actual savings and are deceptive. A traditional assets-versus-liabilities approach shows US consumers’ are in much better shape. Total household assets rose to $164.7 trillion in Q2 2023, up $5.5 trillion from Q1. Subtract liabilities ($18.8 trillion) to find net worth totaling $145.9 trillion, which is more than 8 times disposable income. I am not saying every household is solvent and in good shape, but these aren’t figures you tend to see in a nation of irresponsible spenders.

In summary, when you find inaccuracies in the financial news and realize reality is better than perception, it paves the way for more upside surprises. So, keep questioning what you’re reading, and remember, free markets and global free trade might not be perfect, but they’re a lot better than the alternatives.

Happy Holidays.

Thank you for reading our market insights. To learn more about how we navigate today’s ever-changing environment please schedule a time to talk with one of our associates.

Contact Us