Increasing Household Assets Will Likely Not Compensate for Low U.S. Saving Rate: St. Louis Fed Analysis


ST. LOUIS — Most Americans aren't putting enough money away to ensure the rising living standards to which they've become accustomed and, unfortunately, rising asset values are not going to bail most people out either, according to an analysis by an economist at the Federal Reserve Bank of St. Louis.

William R. Emmons, an economist with the St. Louis Fed's Supervision & Regulation Division, offered that conclusion in the July issue of The Regional Economist, a quarterly publication from the St. Louis Fed that discusses business and economic issues. The publication is also available online at the St. Louis Fed's web site.

Saving rates have been declining in the U.S. for many years, resulting in a negative household saving rate during 2005. But household asset prices have risen dramatically, especially residential real estate since 2000. Might increasing household wealth offset the lack of adequate savings?

Emmons asserted that rising household asset values will likely not compensate for inadequate saving because "conventional measures of household wealth are misleading and incomplete. The true source of wealth ultimately is saving and investment in new assets; capital gains on existing assets can be large in the short run, but turn out to be inconsequential."

He said the biggest shortcoming with standard representations of household balance sheets is that they do not reflect all relevant assets and liabilities. For example, human capitalthe expected value of future earnings from workis missing from the asset side, while future taxes and other unavoidable expenses are left out of the accounting for household liabilities. "Although they are difficult to measure, this does not justify excluding them from a more complete analysis," Emmons said.

When measured on a more comprehensive and internally consistent basis, household balance sheets have strengthened much less in recent years than is commonly believed. The underlying reason is that household saving has been very weak.

One notable adjustment that Emmons believes should be made to household balance sheets to make them reflect economic reality relates to owner-occupied housing.

"Typically, houses are considered only as assets," said Emmons. "Rising house prices during recent years therefore create the impression that household wealth has increased a great deal. But the associated cost of living in those very same houseswhat economists call the flow of future housing servicesis a very real, but unrecorded, liability. National income accounting calls what a homeowner would have to pay if the house were rented rather than owned the 'owners equivalent rent,' but this concept is not included in conventional household balance sheets."

In fact, for the nation as a whole, Emmons said the value of owner-occupied houses as assets is matched precisely by the expected cost to those households of purchasing housing services from themselves. In aggregate, therefore, changes in house prices do not change comprehensive measures of household wealth at all because rising expected future housing costs offset rising house values. "Making this accounting adjustment alone," he said, "wipes $20 trillion off of U.S. households net wealth."

Another unreliable source of increasing household wealth cited by Emmons is short-tem changes in the prices of stocks, which, he said, "go up and down much more from year to year than the underlying economic value of the capital stock they represent."

In short, Emmons concluded that "rising household asset values are not a substitute for savings and should not encourage us to ignore the danger signal associated with low savings and investment in our future prosperity."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.


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