BY JOE BRISBEN
For the last two months, I kept hearing two (for want of a betterword) truisms: 1. Americans don’t save. 2. An inverted yield curve, whereshort-term rates are higher than long-term rates, means a recession is imminent.What I have discovered is that both statements—for the most part—arenot true.
The U.S. Bureau of Economic Analysis (BEA) does have recent figures that showthat American consumers spent more than their after-tax income during sevenof the last eight months, and through last November had a negative savingsof minus $39 billion.
To arrive at those figures, the BEA adds sources of income: wages, salaries,interest, dividends, rent, proprietor’s profits, social security, andunemployment insurance benefits. It then subtracts taxes to arrive at disposableincome. Is this right?
Brian S. Wesbury, chief investment strategist at Claymore Securities, andhis colleague, Senior Economist Bill Mulvihill have made observations thatshow that Americans’ lack of savings is a myth. They claim the BEA’smethod of computing disposable income is wrong.
For example, they point out, when a consumer buys a car, a home, or a computer,the BEA immediately subtracts the entire amount from income, even if it ispaid for over time. Spending on education is counted as consumption. But theseexpenses, Wesbury and Mulvihill argue, are investments. On corporate books,they would be treated as such.
The two researchers also show that, while 401k plans, IRAs, and other savingsplans are accounted for, capital gains on these assets or on a home do notcount as income with the BEA. Nevertheless, the BEA subtracts taxes paid oncapital gains from disposable income. That creates a downward bias.
Wesbury and Mulvihill point out that when retirees spend from savings, thatsituation also creates a downward bias. Moreover, they add, the governmenthas a difficult time separating business from personal spending because somany businesses buy supplies from such retail outlets as Office Depot, Staples,Home Depot, and Lowe’s. Therefore, to the extent that the governmentcounts business spending as consumption, savings will be undercounted.
To top it off, Wesbury and Mulvihill point out that personal income, wages,and salaries can be significantly understated because income statistics aregathered by the Establishment Survey, which is notorious for undercountingemployment.
For example, last March, wages and salaries were revised upward by 1.8 percentor $92.7 billion. If the same type of revision occurs this year, the negativesaving rate will be revised away. This is highly likely, the researchers assert.They claim that the Federal Reserve in its quarterly Flow of Funds Accountsdoes the best job of calculating household savings.
The Fed’s data shows that U.S. households had $62.5 million in assetsat the end of September, $11.4 trillion in liabilities, and a net worth of$51.1 trillion. Wesbury and Mulvihill note this is a record and $5 trillionmore than a year before. Of the increase, $3.3 trillion was in financial assets.This suggests, according to Wesbury and Mulvihill, that—contrary to publicopinion supported by poor data from the BEA—U.S. households are amongthe best savers in the world. So, America, keep on doing with your money whatyou are doing.
Now, let’s deal with the inverted yield curve. For some months, in responseto two years of increases by the Fed in the fed funds discount rates, short-termrates have been rising while long-term rates have stayed about the same. Onewould think that long-term rates would have risen in concert with the short-termones.
Actually, I have seen yield curves with short-term rates higher than long-termrates, and they have acted like a whip. The yield curve on the long end whirlsupward. Borrowing does become more expensive, and we do have a recession.
However, I have also seen inverted yield curves where short-term rates golower, and the rest of the curve sags with it. As one humorous economist oncetold me, “Inverted yield curves have predicted nine of the last fiverecessions.”
Business Week Online deals with the nuances of the current inverted yieldcurve. Many economists say the current inversion will not lead to recessionbecause short-term interest rates are relatively low compared with past inversions.
This means that consumers and business can still obtain credit at historicallyattractive rates. The economists also argue that foreign investors, who havebeen buying long-term treasuries voraciously, have depressed long-term yields,thanks to demand. So those economists don’t look for a recession in 2006.