The current and projected massive annual federal deficits trigger questions.  A big one is: how will the US finance this onslaught of debt and also find the necessary savings to invest in the economy so that growth can resume?  

Don Rissmiller of Strategas argues that “Even if corporate profits rebound, it’s tough to see more than $400 billion in undistributed profits.”  He notes that a personal savings rate (PSR) of 6% (April was 5.7%) would add an additional $600 billion.  Don concludes that the US is still $800 billion short, and that sum will have to be funded by “foreign capital.” 

But what if the Personal Savings Rate (PSR) is higher?  That means the pressure to attract foreign capital flows is not as severe as markets currently assume.

Dean Maki of Barclays Capital compared the PSR estimate from the Flow of Funds (FOF) report with the computation of the PSR that Don is using.  Maki suggests that the PSR estimate will be revised by the Bureau of Economic Analysis (BEA) in July.  He expects it to go higher.  Maki’s work shows an extraordinary gap between FOF data and current savings rate estimates.  Assuming FOF data is a leading indicator of the forthcoming BEA revised estimate, we can look at four decades of history and surmise that the current PSR is much higher than the reported 5.7%.  Our best guess is that it is somewhere between 7% and 9%. 

If we are correct, that would explain why the US deficit is being financed without as much pressure on interest rates as many believe we should be seeing.  Each percentage point shift in the PSR amounts to about $100 billion in cash that is being transferred from spending streams by American consumers into savings vehicles of some type. 

To help us sort through this puzzle we asked a series of questions to Robert Parker.  Bob is a colleague in several organizations, including NBEIC* and NABE*, a trusted friend of many years, a good musician (although he is shy about it) and, more importantly for this commentary, Bob is an expert in federal statistics.  He is the former BEA Chief Statistician and Director of National Accounts.

Our Q & A with Bob Parker follows. 

DRK:  “Bob, what are these forthcoming revisions, so we may inform our readers?”

BP: “At the end of July, the Commerce Department’s Bureau of Economic Analysis will release its first (“advance”) estimate of second-quarter GDP. In addition to this first take at second-quarter economic activity, BEA also will release revised estimates of the complete set of GDP accounts -- back to 1929 annually, 1947 quarterly, and 1959 monthly. It makes these massive revisions every five years or so in what it calls a ‘comprehensive revision.’ (Normally they would revise only the past three years.)  Such major revisions are critical to maintaining the reliability of the accounts, because they allow BEA to incorporate the results of the most recent quinquennial economic censuses – this time for 2002.”

DRK: “Are these usually administrative, or can they be substantive?”

BP:  “Such major revisions have occasionally rewritten economic history by showing that GDP fell earlier or later than previously estimated or that personal saving was stronger in the revised estimates. Consequently, most economists are wondering whether any such important revisions are likely this July.”

DRK: “Are there any methods that can estimate the size of the revisions in advance?”

BP:  “Speculating on such revisions is hard to do. On the one hand, BEA has provided lots of detailed information on its Web site (www.bea.gov) on how the accounts will be changed, including a few new definitions, a new classification system for consumer spending, and the re-basing of the chained-dollar estimates from 2000 to 2005. In contrast, BEA has released only sketchy information on the size and direction of the revisions: that GDP for 2002 will be revised up $202 billion, or 1.9 percent, with about $150 billion of the revision to consumer spending. We also know from BEA’s published methodology that these revisions will be extrapolated back to 1998 (the last economic censuses were in 1997) and then extrapolated forward to 2005 using essentially the published estimates, and then to 2008 using the published estimates plus whatever new annual surveys have been published since July 2008.”

DRK: “Can you speculate on some changes that may be forthcoming?  We are certainly interested in the personal savings rate.”

BP: “So if we want to speculate about revisions to the personal savings rate – such revisions could give economists a different picture about the recent health of the consumer – we need to speculate about personal outlays and incomes. We can get a reasonably good take on outlays, most of which come from consumer spending, extrapolating the revised 2002 estimate by the currently published data. We extrapolate the revised 2002 estimate by the published consumer spending estimates for 2002-2008 and get an expected upward revision to 2008 consumer spending of some $200 billion. That amount is slightly above the currently published estimate of savings and so savings would be higher.”

DRK: “What about the income side?”

BP:  “Of course, this upward revision to outlays could be more than offset by an upward revision to incomes. As for data on the revisions to incomes, BEA will be using new data for 2007-08, except for wages and salaries, and the new method for handling disasters, like Hurricane Ike that hit in 2008. We also know that BEA will using a new source for estimating income misreported to the IRS, but I have no idea whether it will be more or less. The bottom line is that we know very little, although some followers of these revisions have observed that upward revisions to personal savings are common, so why not again.”

DRK: “Got any sense of the size of the number?”  

BP: “Although not out of the question, given the upward revision to spending, a lot more income would be needed first to offset the upward revision to consumer spending – about $200 billion for 2008 -- and then to actually increase savings and the savings rate.”

We thank Bob Parker for his help. And we also thank Don Rissmiller and Dean Maki for their inputs. 

We think the Personal Savings Rate is going to be a surprise when released; Dean Maki has found a clue in the Flow of Funds reports.  Furthermore, a higher savings rate than currently estimated explains some of the other data we are seeing and also helps explain how the large Treasury auctions are able to be absorbed.  It looks like it is not just Chinese and other foreign buyers.  It also looks like the consumer retrenchment is deeper than markets suspect. We will know in a month. 

*NBEIC is the National Business Economics Issues Council; NABE is the National Association for Business Economics.