This is a guest post from Stephen Popick, a US Government Economist and long-time Forums Administrator / Guest Writer for GetRichSlowly.com. His new series here will touch on bridging the gap between the global economy and the personal economy; understanding what statistics mean for personal fiscal planning in the next year. Mr. Popick is a long-time swing dancer who also enjoys scootering, softball, and Civilization IV.
In this first column, I would like to touch on a statistical number that is grossly misrepresented in the pop media, how it should be interpreted, and how to apply a new understanding what it means to your personal finance planning.
The Bureau of Economic Analysis reports the PSR. In their news releases is embedded a definition of this calculation, which isn’t what we’d think it is, since it says “Savings”.
The PSR measures:
(Personal After-Tax Income minus Personal Outlays) / (Personal After-Tax Income)
Included in Personal Outlays would be things like 401Ks, Roths, CD, Stocks, Bonds, Commodities, etc. But aren’t these considered to be savings? Not by the PSR, because you have to outlay cash to buy them!
In short, the personal savings rate doesn’t measure savings! It’s more a measure of cash-flow
In actuality, savings rates could be going up as we cut back on disposable consumables (likely a good thing), or it could also be that consumers have stopped contributing to the 401ks (likely a bad thing) and the real savings rate is lower. What is known is that however we’re saving; we’re saving with less risk (and less return).
Let’s wrap this back into what it means for you, the personal finance blog reading consumer. What you know from this statistic is that the typical American consumer is keeping more greenbacks in the bank or in their mattress (By the way, this also nicely explains why inflation hasn’t gone up much). Further, it may mean that consumers are moving out of riskier savings vehicles and deciding to spend some money on consumables and keep the remainder in very safe low yield accounts.
For the Personal Finance blog reader, what does PSR mean to you? For most folks, the PSR increases reflect the current uncertain economic situation and “emergency funds” are more funded these days. Of course, if you already had a well-funded emergency fund, then you might want to consider a different reaction. If my conjecture above is correct that investment activity is lower now as consumers substitute 401K savings or bond savings to cash-like savings, then follow Warren’s advice to “Be greedy when others are fearful”as there would be a greater chance of some good long-term investments being sold at a wonderfully reduced price. Further, the PSR appears to be continuing to rise. You can bank on the current economic climate continuing beyond the next 12 months pretty certainly based on this.
Next week, I’ll cover just what the real story is behind the mysterious Unemployment Rate and why it shouldn’t be used to measure how the economy is at this very moment. Controversial statement, but I will explain it neatly. As a teaser, did you know there are 6 different versions of it? Which one is reported?