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David Kelley
current misalignment between saving and net 12 12
Exhibit 3: The Standard Net Worth Model For a while, this forecast did well. During the most
has Over-Predicted Saving intense part of the crisis, the personal saving rate
Percent of disposable income Percent of disposable income
jumped from 1% in early 2008 to almost 5½% about a
14 14
year later (on a three-month average basis) as US
Out-of -Sample households retrenched sharply; federal stimulus also
12
Forecast*
12 helped. However, the saving rate has retraced about
half of this increase over the past year and, as already
10 10 noted, now sits well below the “desired” level implied
by the current ratio of net worth to disposable income.
8 8
4 4 4 4
2 2
2 2
0 0
0 0
-2 Household Financial Balance: -2
-4 Actual -4
-2 -2
Forecasted*
Household Financial Balance -6 -6
-4 -4
55 60 65 70 75 80 85 90 95 00 05 10
Personal Saving Rate
* Based on a regression of the household f inancial balance (expressed
-6 -6 as a percentage of disposable income) on the ratio of net worth to
90 92 94 96 98 00 02 04 06 08 10 disposable income, 1952-1990.
Source: Department of Commerce. Source: Department of Commerce. Our calculations.
1990 on. Readers who have followed our research on More importantly, when we substitute the household
the financial saving/investment balances of various balance measure of the saving rate into the saving/net
sectors of the US economy may recognize the new worth model, the problems noted earlier disappear
measure as nothing more or less than the household completely. In particular, the over-prediction bias is
component of the private-sector balance. The only no longer evident, as shown in Exhibit 5. While the
difference is that we have scaled it to disposable path forecasted by the model fitted to data from 1952
income rather than to GDP, to make it more directly through 1990 misses some twists and turns and
comparable to the conventional saving rate.3 forecasts others that never happened, it is remarkable
that it does not go off track over such an extended
Two points pop out immediately from Exhibit 4. period.4 And the one turn that it catches quite well is
First, when outlays for housing are taken into account, the latest upswing. Consistent with these results, the
US households dissaved throughout the decade-long full-sample estimates are almost identical to those for
housing boom from the mid-1990s to the mid-2000s. the shorter sample. In both cases, the current level of
This makes sense given the nature of that event—the the saving rate as defined by the household financial
prospect of large capital gains in residential real estate balance is right in line with the current level of the net
enticed many households to lever up their balance worth ratio.
sheets. (Bear in mind that neither saving rate includes
capital gains, on real estate or on other assets.) Finally, our analysis suggests a reason for the renewed
strengthening in consumer spending in recent months,
Second, households’ saving response to the stresses of namely that reduced expenditure on housing has freed
recent years has been both much larger and longer in up funds for other uses. The homebuyer tax credit
duration than implied by the conventional saving rate. passed as part of the American Relief and Recovery
According to the household financial balance, the Act (ARRA) originally had a deadline of November
adjustment got underway in late 2005, when housing 30, 2009. While that was eventually extended (to
activity began to turn down. By mid-2009 this April 30, 2010 for contracts and June 30 for closings)
measure of the saving rate had risen by 9 percentage home sales collapsed during the winter and have yet to
points of disposable income, a move much more in show much life in advance of the next set of
keeping with the dimensions of the crisis itself. deadlines. If households perceive some degree of
substitutability between housing activity and
consumer spending, then it stands to reason that a
pullback in one would make more room for the other.
3
And the true addicts of the saving/investment balance
literature will note that we have said nothing about the
statistical discrepancy, implicitly putting it somewhere
4
else other than in the household sector. As it happens, This is all the more remarkable considering that—as
our conclusions are robust to the incorporation of the noted earlier—no effort was made in either out-of-
statistical discrepancy into the household balance. We sample forecasting exercise to embellish the model
have elected to exclude it for ease of exposition. with other variables or to correct for auto correlation.
0 0
This assumes no change in our view that growth in
-1 -1
disposable income will remain sluggish, which so far Total Private Employment
looks appropriate. Over the next year (from the -2 -2
-6 -4 -2 0 +2 +4 +6 +8 +10 +12 +14 +16 +18
second quarter of 2010 through the first quarter of Months f rom End of Recession
2011), we expect disposable income to rise only about *Excludes the 1980 recession. **Assumes recession ended June 2009.
1½% in real terms. This is better than the ¾% gain of Source: Department of Labor.
We, Jan Hatzius, Ed McKelvey, Alec Phillips, Andrew Tilton and Sven Jari Stehn hereby certify that all of the views expressed in this report accurately reflect personal views, which have not been influenced by considerations
of the firm’s business or client relationships.
Time Estimate
Date (EST) Indicator GS Consensus Last Report
Mon Apr 12 14:00 Federal Budget Balance (Mar) -$62.0bn -$80.0bn -$191.6bn
(per CBO)
Tue Apr 13 8:30 Trade Balance (Feb) -$40.0bn -$38.8bn -$37.3bn
8:30 Import & Export Prices (Mar) n.a. +0.9% -0.3%
10:45 Fed Gov Tarullo spks to Council of Institutional Investors
19:15 Richmond Fed Pres Lacker spks on US econ outlook; WV
Wed Apr 14 8:30 Consumer Price Index (Mar) +0.14% +0.1% Flat
Ex Food and Energy +0.13% +0.1% +0.1%
NSA Index 217.881 217.714 216.741
8:30 Retail Sales (Mar) +2.0% +1.1% +0.3%
Ex Autos +1.0% +0.5% +0.8%
9:30 Cleveland Fed Pres Pianalto spks at Minsky Conf; NYC
10:00 Business Inventories (Feb) n.a +0.3% Flat
10:00 Bernanke testifies before Joint Economic Committee; DC
13:00 Dallas Fed Pres Fisher spks at Minsky Conf; NYC
14:00 Fed “Beige Book”
19:00 NY Fed’s Sack spks on financial crisis; NYC
Thu Apr 15 8:30 Initial Jobless Claims n.a. 440,000 460,000
8:30 Continuing Claims n.a. 4,600,000 4,550,000
8:30 Empire Manufacturing Survey(Apr) n.a. +24.00 +22.86
9:00 Net Long-Term TIC Data (Feb) n.a. -$33.4bn
9:15 Industrial Production (Mar) +1.1% +0.7% +0.1%
9:15 Capacity Utilization (Mar) 73.6% 73.3% 72.7%
10:00 Philadelphia Fed Survey (Apr) 21.4 20.0 +18.9
10:30 Richmond Fed Pres Lacker spks at credit markets conf
13:00 Homebuilders’ Survey (Apr) n.a. 16 15
Fri Apr 16 8:30 Housing Starts (Mar) +5.0% +6.1% -5.9%
9:55 Reuters/U. Mich Consumer Sentiment—Prel (Apr) n.a. 75.0 73.6
13:00 KC Fed Pres Hoenig spks on finl crisis at Minsky Conf