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Household Income, Demand, and Saving:
Deriving Macro Data with Micro Data Concepts
Barry Cynamon
Frontiers of Measuring Household Economic Behavior
Federal Reserve Bank of Boston, April 27, 2015
Multi-year research project linking household finances and economic growth
Acknowledgements
Multi-year research project linking household finances and economic growth
Acknowledgements
• Joint work with Steve Fazzari • Generous support from INET
• Opinions are mine and not those of the Fed
Reconciling macro and micro estimates of U.S. household income and expenditures
This Session
Reconciling macro and micro estimates of U.S. household income and expenditures
This Session
• Understand how the aggregate measures are distributed
• Validate survey measures comparing to trusted aggregate measures
• Learn from aggregates consistent with micro data concepts
INEQUALITY AND CONSUMPTION Motivation for Measurement
“Inequality, the Great Recession, and Slow Recovery” Forthcoming in the Cambridge Journal of Economics Working paper available at SSRN: http://ssrn.com/abstract=2205524
Investigate relationship between income inequality and Great Recession
The Original Goal
Investigate relationship between income inequality and Great Recession
The Original Goal
• Rich have lower propensity to consume
– (Maki and Palumbo 2001)
• Increasing share of income flowing toward rich
– (Piketty and Saez, 2003; CBO, 2013; Johnson and Smeeding, 2014)
• Downward pressure on aggregate consumption ?
Increasing share of income flowing toward rich
Income share of the top 5% of US households
Source: The World Top Incomes Database
15%
20%
25%
30%
35%
40%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Consumption Drove Economic Growth
Consumption share of GDP
55%
60%
65%
70%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Source: BEA National Income and Product Accounts
Households Doubled their Leverage Debt to income ratio of US households
Source: FRB Financial Accounts of the United States
40%
60%
80%
100%
120%
140%
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
Find a micro data set with income and consumption expenditure
Initial Plan
Find a micro data set with income and consumption expenditure
Initial Plan
• SCF: oversamples wealthy, but no consumption data • CPS: annual and large sample, but no consumption
• CE: fails to match aggregate data in level or trend
– Under-reporting especially among higher income households (Sabelhaus, Johnson, Ash, Swanson, Garner, Greenlees, Henderson, 2013)
Use a mix of aggregate and micro data to generate results at “group” level
Revised Plan
Revised Plan
• SCF: for distribution of balance sheet accounts
• CPS: for distribution of income
• National accounts: for authoritative time series
Use a mix of aggregate and micro data to generate results at “group” level
Maki and Palumbo (2001)
• Numbers add up to net worth and saving for the
personal sector published in the FAOTUS
• Distribution matches the SCF in every survey year
Assets and Liabilities Income
Stocks Flows
Aggregate FAOTUS FAOTUS NIPA
disposable personal income
Micro SCF *identification CPS
shares interpolated linearly between waves
assume flows proportional to holdings
money income
M&P for group-level saving numbers and then back out consumption numbers
Revised Plan ii
M&P for group-level saving numbers and then back out consumption numbers
Revised Plan ii
• Mark Zandi provided us with saving rate information
derived using the M&P approach
• First, we adjusted those FAOTUS saving numbers to match NIPA saving numbers
• Then we allocated NIPA transfers and interest between our groups so we could back out “group” consumption
M&P for group-level saving numbers and then back out consumption numbers
Revised Plan ii
Disposable Income
Saving Outlays − =
Consumption Transfers Interest Outlays = + +
Consumption = Disposable Income
− Saving − − Transfers Interest
Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality
The Story
Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality
The Story
Before Great Recession:
• Debt to income ratio of non-rich grew before GR
• Consumption rate of non-rich stable or rising After Great Recession:
• Consumption of rich only has recovered
• Per capita, real GDP far below trend after Great Recession
Non-rich took on debt to maintain consumption, which delayed the effect of rising inequality
The Story
Before Great Recession:
• Debt to income ratio of non-rich grew before GR
• Consumption rate of non-rich stable or rising After Great Recession:
• Consumption of rich only has recovered
• Per capita, real GDP far below trend after Great Recession
Debt to income ratio of non-rich increased
25%
50%
75%
100%
125%
150%
175%
200%
Bottom 95%
Top 5%
Source: FRB Survey of Consumer Finances, data provided by Romain Ranciere
Consumption rate of non-rich stable or rising
70%
75%
80%
85%
90%
95%
100%1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Consumption Rate 95% Consumption Rate 5%
Outlay Rate 95% Outlay Rate 5%
Source: Cynamon and Fazzari (2015)
Consumption of rich has recovered; that of non-rich has not
80
100
120
140
160
180
200
220
240
260
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Index of Real Consumption, Bottom 95% and Top 5% (1989=100)
Bottom 95% Top 5%
Source: Data from Cynamon and Fazzari (2015)
GDP well below trend after Great Recession
Per capita, real GDP, chained dollars (exponential trend)
Source: BEA National Product Accounts
$5,000
$20,000
$35,000
$50,000
$65,000
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
MEASURING DEMAND Measurement Exercise
“Household Income, Demand, and Saving: Deriving Macro Data with Micro Data Concepts” Forthcoming in the Review of Income and Wealth Working paper available at SSRN: http://ssrn.com/abstract=2211896
Motivation
Reconcile macro and micro estimates of U.S. household income and expenditures
Motivation i
• Maki and Palumbo (2001) reliant on consistent concepts – CPS income distribution applied to NIPA disposable personal income – SCF net worth distribution applied to FAOTUS balance sheet
• But there are inconsistencies between micro and macro data – Not just sampling error; important conceptual differences
• Previous efforts to match NIPA and survey income – Katz (2012), Bosworth et al. (2007)
Reconcile macro and micro estimates of U.S. household income and expenditures
Comparisons to Survey Data
CPS SCF
PSID
0.60
0.70
0.80
0.90
1.00
1.10
1988
1991
1994
1997
2000
2003
2006
2009
2012
0.60
0.70
0.80
0.90
1.00
1.10
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
0.60
0.70
0.80
0.90
1.00
1.10
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Pre-tax income data from surveys well below 100% of
NIPA personal income
Motivation ii
• Might learn from macro measures adjusted to match micro concepts – PCE vs. what households actually spend
– Different definitions of saving may tell different stories
Reconcile macro and micro estimates of U.S. household income and expenditures
Objective
• Eliminate imputed value of services in consumption – Example: Imputed rent
• Eliminate spending not controlled by households – Example: Medicare
Measure the flows of purchasing power under the control of the household
Objective
• Household financial flows the way households actually see these flows
• Concept likely to correspond better with flows households report on surveys
Measure the flows of purchasing power under the control of the household
Key Identity
• Accounting identity maintained before and after adjustments:
Disposable Household Transfers Financial Income = Consumption + Investment + & Interest + Saving
• Identity holds in NIPA – Household investment not distinguished from financial saving
• Adjustments to consumption or income require balancing change elsewhere
Housing Example (2013 $billions)
Disp. Income
Cons. HH Invest. Trans. & Int.
Fin. Saving
Implicit Rent - 1326 - 1326
Intermediate Inputs + 152 + 152
Mortgage Interest + 334 + 334
Depreciation + 312 + 312
New Construction Single-Family Homes
+ 426 - 426
Broker commissions + 105 - 105
Total - 528 - 1068 + 321 + 334 - 115
• Eliminate “rent home to yourself” business
Other Important Adjustments
• About 40 separate adjustments
• Remove non profit institutions that serve households
• Free financial services
• Medical care – Employer and government, not households
• Retirement accounting – Exclude contributions by employers and government to defined
benefit plans – Include benefits from DB plans
Other Important Adjustments
Category Disposable
Income Consumption
Transfers & Interest
Financial Saving
Owner-Occupied Housing
-4% -9% 81% -19%
Financial Services -6% -2% -76%
Defined Benefit Pensions
-1% -27%
Third-Party Paid Medical Services
-13% -14%
Non-Profit Sector -1% -4% 61% 8%
Other -2% -30%
Adjusted Data 73% 70% 242% -44%
Note: Household investment excluded form table, because it has no clear personal sector counterpart in the NIPA
Adjusted measures: real, per capita
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
19481953195819631968197319781983198819931998200320082013
Disposable Personal Income
Adjusted Disposable Income
$0
$1,000
$2,000
$3,000
$4,000
$5,000
19481953195819631968197319781983198819931998200320082013
Personal Interest and Transfers
Adjusted Transfers and Interest
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
19481953195819631968197319781983198819931998200320082013
Personal Consumption ExpendituresHousehold DemandAdjusted Consumption
-$4,000
-$3,000
-$2,000
-$1,000
$0
$1,000
$2,000
$3,000
$4,000
19481953195819631968197319781983198819931998200320082013
Personal SavingAdjusted Gross Household SavingFinancial Saving
Disposable Income Transfers and Interest
Consumption Saving
Comparisons to Survey Data
CPS SCF
PSID
0.60
0.70
0.80
0.90
1.00
1.10
1988
1991
1994
1997
2000
2003
2006
2009
2012
0.60
0.70
0.80
0.90
1.00
1.10
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
0.60
0.70
0.80
0.90
1.00
1.10
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Note: All measures shown pre-tax; CBO net realized capital gains added to adjusted disposable income to match SCF, which includes realized gains.
Expenditure Shares of Income
70%
75%
80%
85%
90%
95%
100%
105%
110%
115%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
Adjusted Consumption Household Investment Adjusted Transfers and Interest
0%
Bigger Collapse: Cash Flow Measure
82%
84%
86%
88%
90%
92%
94%
96%
98%
100%
102%
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
Demand Rates: NIPA Definition and Adjusted
NIPA PCE / NIPA DPI Adj HH Dem / Adj DPI
New saving rate concepts
-15%
-10%
-5%
0%
5%
10%
15%
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
NIPA Saving Rate Adj. Gross Household Saving Rate Adj. Financial Saving Rate
Future Directions
1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change – Wondering if anybody at the Board would like to team up with us
2. Investigate the business cycle properties of the micro-consistent aggregate consumption series – Would like to generate quarterly-frequency numbers
3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level – Joint work with Daniel Cooper
Future Directions
1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change – Wondering if anybody at the Board would like to team up with us
2. Investigate the business cycle properties of the micro-consistent aggregate consumption series – Would like to generate quarterly-frequency numbers
3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level – Joint work with Daniel Cooper
Future Directions
1. Use the Maki and Palumbo procedure with micro-consistent aggregate income and saving series; see if the results change
– Wondering if anybody at the Board would like to team up with us
2. Investigate the business cycle properties of the micro-consistent aggregate consumption series – Would like to generate quarterly-frequency numbers
3. Exploit panel structure of PSID to see if story of rising balance sheet fragility among non-rich followed by discrete fall in consumption during GR holds up at household level – Joint work with Daniel Cooper
Recommended