THE SAVINGS SURPRISE

THE SAVINGS SURPRISE

How much have Americans cut back?

On the face of it, not much. The official data from the Bureau of Economic Analysis say that in February personal spending was down 0.4%, or $40 billion, from the year before. Certainly any drop is bad news, since consumer spending rarely decreases--but $40 billion out of total spending of $10 trillion doesn't seem like enough to wreak economic havoc.

A closer look, however, shows that Americans have tightened their belts more sharply than the numbers report. The reason? Official figures for personal spending include a lot of categories, such as Medicare outlays, that are not under the control of households. They also include items, such as education spending, that should be treated as investment in the future rather than current consumption.

After removing these spending categories from the data, let's call what's left "pocketbook" spending--the money that consumers actually lay out at retailers and other businesses. By this measure, Americans have cut consumption by $200 billion, or 3.1%, over the past year. This explains why the downturn has hit Main Street hard.

Since savings are what's left from disposable income after subtracting outlays, a deeper fall in consumption means a bigger jump in the savings rate. The same analysis implies that the "pocketbook" personal savings rate has risen from near zero a year ago to around 6.4%, rather than the official 4.2%. Thus, households may have gotten a great start on repairing their balance sheets.

Let's break down the spending numbers. Over the past year, outlays on durable goods such as automobiles decreased by a deep 10.8%. Spending for nondurable goods such as clothing fell by 4.2%.

The tricky issue comes with spending on services, which seems to be up by 3.3%, or $200 billion, since February 2008. That number includes a hodgepodge of expenditures that don't correspond to what we mean by "consumer spending." For example, health-care spending, including prescription drugs, is up by $112 billion. But roughly 85% of such spending is funded by government or employer health insurance plans, neither of which directly comes out of the pockets of consumers.

Similarly, the consumer spending numbers include outlays by religious groups and nonprofit foundations, such as the Bill & Melinda Gates Foundation, which is increasing its outlays by about 15% in 2009, to $3.8 billion. The BEA estimates that religious and foundation spending have risen by about 3% from the past year, pushing up reported consumer spending.

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Another quirk: Spending on education is considered consumption rather than investment in human capital. As a result, more people going back to school during the downturn leads to a reduction in the savings rate. That doesn't make much sense.

Finally, for technical reasons the BEA throws in some "spending" categories where no money actually changes hands. The biggest is "rent on owner-occupied housing," the money that people supposedly pay themselves for living in their own homes. Despite the housing bust, this number rose by 2.6% over the past year, to $1.1 trillion.

The BEA will make some changes this summer, which will improve the calculation of the savings rate for households. But for now, suffice it to say that Americans have taken thrift to heart much more than the official numbers show.

For a full explanation of how the pocketbook savings rate was calculated, see my blog Economics Unbound at businessweek.com/the_thread/economicsunbound/