In the last post, I mentioned the fact that the US personal savings rate was relatively high. And the context for this was how the Fed might believe savings act as a cushion for consumers. At the margin, this cushion would give the Fed less pause in raising interest rates. But let’s look at why the figures are so high.
Benchmark revisions and residual Q1 seasonality
This report was the first under a major revision to reporting of US economic data. The Commerce Department make these adjustments called ‘benchmark revisions’ from time to time in order to address systemic problems with economic data.
For example, one problem that the Commerce Department says it has addressed is the residual seasonality of Q1 GDP reporting. The numbers in Q1 have been consistently weaker than the rest of the year, this year included. And so, the Commerce Department believes something has changed to make the quarter look weaker than it actually is. The benchmark revisions have altered how seasonality is calculated for GDP to correct those concerns.
You can see these changes most in Q4 and Q1 numbers. For example, growth in Q1 2016 was originally reported as an anemic 0.6%. With the revisions, it has been revised up to 1.5%. By contrast, growth in Q4 2017 was revised down to 2.3% from the originally reported 2.9%.
Overall, growth now averages 2.1% in Q1 from 2012 to 2017. That’s significantly up from 1.6%.
In the end, the benchmark revisions also ended up making the latter stages of the Obama era look better than originally reported and the first months of Trump’s regime look weaker. The Benchmark Revisions added $82.7 billion to US GDP at the tail end of 2016 and took them away from the beginning of 2017.
The personal savings rate stood out
The shift I saw as most important here was the personal savings rate. The saving rate in 2016 and 2017 is now 6.7%, up significantly from the originally estimated 4.2%.
I believe this will make the Fed less worried that consumers are in such dire straits that any increase in inflation or interest rates would force a cutback in spending. Now, in 2016, the Federal Reserve did report that 44% of US households said they would be stuffed in meeting an emergency expense of just $400. So I think it would be mistaken of the Fed to believe this obvious distress isn’t actually there.
Moreover, if you look at why the personal savings rate went up, it’s not because the precarious situation of the bottom ladders of the income spectrum are better off. Most of the upward revision in the personal savings rate was due to small businesses making more money, not because ordinary workers made more money. In a sense, you could say, these revisions should increase our concerns about inequality while also not lessening any concerns we may have about the negative impact of higher inflation or interest rates on the bottom income rungs.
Final thoughts
Even so, my overall impression of this latest GDP report was good. It was solid front to back from growth to inflation to savings to investment. There were no major problems in any of the major data lines beneath the headline 4.1% number. I view this as supportive of more tightening and of an acceleration of the Fed’s rate hike timetable.