$100bn discovered down the back of US sofa

Tom Traill - 09 August 2018

As sofas go, the one in the US Bureau of Economic Analysis has an impressive capacity to conceal cash. Less of a sofa and more of a portal to a lost world. So, the discovery of almost US$100bn of unrecorded national income must be a cause of national celebration – right? Cash-strapped US consumers will rush to the malls and forecourts to stake their new-found claims to goods and services? Actually no. No-one has a dime more than they already knew, and no reason to spend more vigorously than they had previously planned.

While the US national income and product accounts (NIPA) do a pretty good job of adding everything up, this calculation is only as good as the data collection process, which falls rapidly out of date. The periodic benchmarking exercise is a belated attempt to catch up with the economic reality. Hence, we must be careful not to set too much stock by NIPA – metaphorically and literally. The most recent example of its wayward tendencies is the rewriting of the US national accounts as part of their five-yearly comprehensive review.

The review incorporates new tax data, an adjustment to the measurement of capex and better seasonal adjustment. The upshot is that the nominal US economy is now believed to be $100bn larger than previously reported – an increase equivalent to the economic size of Ecuador – although the growth rates of national income and output remain broadly the same.

As with the UK’s equivalent exercise last autumn, the most significant change is a reassignment of income from corporations to households: thereby overwriting the previously very low household saving rate. This restores the savings rate (figure 1) to a level more consistent with the rate of acquisition of financial assets and alleviates some concerns over the resources available to households in the event of an economic slowdown. Rather than dropping away in recent periods, the savings rate now is reported to have been broadly flat for the past five years (figure 2). Until the next benchmarking exercise in five years’ time.

There are likely implications from the revisions to the data. Some measures of wage inflation will probably be revised upwards, including unit labour costs. Various forecasters, including Goldman Sachs, have since mechanically upgraded their outlook for GDP growth. And the new data may give the Fed more confidence to hike rates faster and/or further.

Assigning more strength to the household sector in the wake of these revisions is a dangerous game. The revisions are skewed to sole-traders and the self-employed, while some other surveys suggest that 50 per cent of US households have no savings at all, and these are the ones who are likely to be in marginal employment and the most likely to be affected by any downturn. The data revisions may well be a boost to investor confidence if GDP is believed to be stronger and households more financially secure. However, what the BEA has discovered is only what was already there.

Figure 1

Data source: ALFRED

Figure 2

Data source: ALFRED

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