Personal Income rose by 0.1% in September while Personal Consumption Expenditures rose by 0.6%. These leads Bill McBride to say

Spending is growing faster than incomes – and the saving rate has been declining. That can’t continue for long …

Which is of course a normal sentiment but I think its wrong.

I would have to check to be sure but I believe there is no necessary limit on how negative the personal savings rate can go.

For example, its my guess, thinking about the way the index is constructed, that an increase in Private Equity mechanically lowers the personal savings rate.

This is because the return generated by a Private Equity firm should be counted as Personal Consumption Expenditures, but not as Personal Income.  Thus Personal Income goes down and Personal Consumption Expenditures go up.


Well, the Private Equity firm is providing a service for investors. How do we measure the value of that service? We measure by the excess return generated by the Private Equity firm over simple savings. This is in essence equal to the entire return to Private Equity.

On the other hand what happens to the returns made by the Private Equity firm. Generally speaking they are rolled over, so they are not paid out to investors.

Thus, mechanically the investors are consuming an enormous amount of financial services but they are not taking in extra personal income. This should mean that the savings rate falls, although what has in practice happened is that the accumulation of capital has risen.

Update: Spencer,in the comments is right. This only applies to the carried interest of the fund managers. The gains that on the balance sheet accrue to the fund investors are not imputed as financial services.