More on GDP revisions, personal savings rates and how the sausage gets made

Earlier today, I mentioned the fact that the Commerce Department revised the personal savings rate for 2016 and 2017 up substantially. The magnitude of the revision is eye-catching. And my inner sceptic wonders how the initial data reads could have got it so wrong. On Monday, I plan to call and ask how these revisions were calculated. But for the time being let me tell you what I know.

The personal savings numbers

Now let’s look at what the New York Times reported this morning:

The bureau made use of a new Internal Revenue Service analysis and concluded that the government had been overestimating the amount of national income held by corporations and underestimating how much of it was held by proprietors of businesses. That meant people — as opposed to corporations — had been sitting on more money than the government previously thought. And that meant the savings rate was higher.

The revised rate for 2017 nearly doubled, to 6.7 percent. So Americans aren’t spending as unwisely as previously thought, although other statistics provide a sobering reminder of how unprepared many people are for an economic shock: In 2016, 44 percent of American households said they would not be able to easily handle a hypothetical emergency expense of $400, according to the Federal Reserve.

Do you see the disconnect? Just two years ago, the Fed was saying that 44% of US households were basically one emergency away from bankruptcy. Yet, the Commerce Department comes out and says, “hold on, guys. Actually. We’re saving more than you thought.” And the NYT actually says, ” So Americans aren’t spending as unwisely as previously thought.”

Every news outlet is reporting these data as fact. But do you believe it?

I mean the revision is stunning, especially in the face of the 44% of households who are self-reporting financial distress.

Here’s what I’m hearing

The BEA data are saying that the personal saving rate in the benchmark revision period from 2012-2017 was revised up to 7.0% from 5.0%. In 2017 alone, the numbers nearly doubled to 6.7% from 3.4%. And the reason is basically because income of sole-proprietor and partnership was a lot higher and corporate income lower because of misreporting on income tax forms.

Now, if you look at the actual report it does give a list of data series from which it derived its benchmark revisions. Look at where the personal savings revisions are coming from (highlighted in yellow)

Personal savings IRS revisions

Source: BEA

The table says 2015 (revised) and 2016 (new) but what I’m hearing is that these numbers are based on extrapolations of previous data sets, not on new data. It’s not that the IRS has new data to make a tax gap estimate. Instead, these numbers are based on data from 2008-2010 that was extrapolated into the 2012-2017 time series. That’s what I’m hearing.

How the IRS explain the data

Here’s how the IRS explains the tax gap:

The gross tax gap is the difference between true tax liability for a given tax year and the amount that is paid on time. It is comprised of the nonfiling gap, the underreporting gap, and the underpayment (or remittance) gap. The net tax gap is the portion of the gross tax gap that will never be recovered through enforcement or other late payments.

And notice the date of publication, highlighted in yellow at the bottom:

Tax Gap data

If you look on the IRS website, they explain this too. There’s nothing about data after 2010

The IRS periodically estimates the tax gap, which gives a broad view of the nation’s compliance with federal tax laws. The new study covers tax years 2008-2010. The report finds that there has been no significant change in the amount of the tax gap or the rate of compliance since the last report was issued for tax year 2006.

The average annual tax gap for 2008-2010 is estimated to be $458 billion, compared to $450 billion for tax year 2006. IRS enforcement activities and late payments resulted in an additional $52 billion in tax paid, reducing the net tax gap for the 2008-2010 period to $406 billion per year. The voluntary compliance rate is now estimated at 81.7 percent compared to the prior estimated rate of 83.1 percent. After accounting for enforcement and late payments, the net compliance rate is 83.7 percent.

So these massive benchmark revisions could be totally wrong.

That’s how the sausage gets made.

I don’t like this one bit. It doesn’t change the basic contours of the GDP data set.

Real GDP 2014-2018

Basically, the economy slowed into mid-2015 as we digested the shale oil bubble’s popping. Afterwards the economy has been steady in the 2%ish zone. Whether it is moving solidly toward a 3%ish number remains to be seen. We will know only when the next quarter’s data come out. I think that data set will be even more illuminating than this one.

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