This box discusses the historically low personal saving ratesaving as a percentage of disposable personal incomethat resulted from the revisions to personal income, largely from the redefinition of dividends affecting the treatment of capital gains distributions of regulated investment companies (see "Dividends" on page 29).
In this annual revision, the personal saving rate for 199597 was revised down significantly, from an average of 4.3 percent to 2.8 percent. The saving rate was revised back to 1982, but the revisions were smaller (see table A). Although the revision to the personal saving rate is large for recent years, the overall trend in personal saving is not changed (chart A). The previously published personal saving rate of 3.9 percent for 1997 was already the lowest rate since 1947. The pattern in the NIPA personal saving rate is similar to that in the Federal Reserve Board's (FRB's) measure of saving, which is based on households' net acquisition of financial assets plus their net investment in tangible assets less the net increase in their liabilities. The FRB's rate is 2.4 percent in 1997, close to the revised NIPA rate of 2.1 percent, and is the lowest rate since 1946, when the series begins.
Since 1991, the year that includes the last cyclical GDP trough, the personal saving rate has declined from 5.6 percent to 2.1 percent. This decline, which reflects a faster increase in personal outlays (mainly in personal consumption expenditures) than in disposable personal income, may be attributable to the "wealth effect," which is the term used to refer to the tendency of households to increase spending in response to an increase in the value of their asset holdings. According to FRB data, nominal holding gains, primarily related to changes in stock prices, increased household net worth by $1,099.2 billion in 1991, or one-fourth of disposable personal income. In 1997, these gains increased household net worth by $3,445.2 billion, or three-fifths of disposable personal income. If these gains are compared with personal saving, the potential impact of the wealth effect is even more dramatic. The ratio of nominal holding gains to NIPA personal saving grew from 4 1/2 in 1991 (compared with a post-World War II high of 8 1/2 in 1947) to almost 30 in 1997./1/ The ratio of nominal holding gains to disposable personal income in 1997 is the highest since 1946, the first year for which this measure is available.
The focus of the NIPA's is on the incomes and savings generated by current production rather than on changes in net worth, which reflect the change in wealth that results from the revaluation of existing assets. This focus on current production is embedded in the definition of GDP, which is the value of goods and services produced in the United States. Thus, GDP does not, and should not, include sales of existing assets, such as stocks or houses, or the capital gains and losses on those assets, in its measure of current production. Related NIPA measures of income and saving likewise exclude income from the sale of existing assets and are restricted to income earned from current production and saving out of current income.
These NIPA concepts and definitions are essential to the NIPA savings-investment account (see NIPA table 5.1 on page 70), which details the equality between saving and investment in the economy and shows the sectoral distribution of savings. This account is useful in analyzing the sources of external deficits and their relationship to a shortfall in private saving (or excess of consumption); it is also useful in other types of analyses, including the interaction between public and private saving, fiscal policy, and the impact of interest-rate and tax policies on saving and investment behavior. The saving-investment identity and the marginal propensity to save out of current income also play a major role in the determination of equilibrium and multiplier effects in macroeconomic models.
1. The increases in the value of asset holdings may not result in increases in consumer spending in the same period that the value increases, because the increases may not be realized in that period. Comprehensive data on "realizations" of asset gains are not available, but it is likely that the gains realized in 1997 reflected value increases in earlier periods and in 1997.