Getting It Right - Significant Underestimation Of Income

Annual revisions or updates of data usually involve small adjustments. But the latest update of the National Income and Product Accounts massively moved the sticks and changed trend lines. In brief, there was correction for a significant underestimation of personal income from small businesses and dividends.

Comprehensive updates of the National Income and Product Accounts (NIPAs) are conducted about every five years by the BEA. The major update this year was to income - with relatively little adjustment to expenditures. This update affects the Bureau of Economic Analysis' (BEA) GDP and Personal Income and Expenditures. From the BEA:

Revisions to nonfarm proprietors’ income for 2007-2017 primarily reflect revisions to estimates of underreported income. Estimates of underreported income for nonfarm proprietors are revised based on newly available Internal Revenue Service (IRS) tax gap data, which is a component of the IRS’ National Research Program.

Revisions to personal dividend income in 2016 and 2017 primarily reflect the incorporation of newly available IRS Statistics of Income data.

The personal saving rate was revised up 1.4 percentage points to 6.4 percent in 2013, up 1.6 percentage points to 7.3 percent in 2014, up 1.5 percentage points to 7.6 percent in 2015, up 1.8 percentage points to 6.7 percent in 2016, and up 3.3 percentage points to 6.7 percent in 2017.

From 2012 to 2017, the average annual rate of growth of real disposable personal income was revised up 0.4 percentage point from 1.8 percent to 2.2 percent.

Just to get a feel of the outrageous change in income - here are before and after graphs. Pay special attention to the changes after 2016.

Growth of Real Disposable Income (blue line) to Real Expenditures (red line)

before revision


Seasonally Adjusted Spending's Ratio to Income (a declining ratio means consumer is spending less of its Income)

before revision


Personal Savings as a Percentage of Disposable Personal Income

before revision


In summary the new "reality" is:

  • the savings rate for individuals is no longer at historic lows and is about average to the levels seen since 1990.
  • the relationship between personal spending and income is no longer at historic highs (meaning the consumer formerly was spending too much against historical norms) and now is about average to the levels seen since 1990.

What is the use of producing data if you cannot get it right? Would we be better off if data were published every five years when it would presumably be more accurate?

One very important takeaway from the new data is that the current eonomic expansion may have more room to run. For almost two years now we have been saying that consumers spending more than they were making in income was unsustainable. Turns out that they have been living more within their means than we thought and sustainability is less of a concern.

Other Economic News this Week:

The Econintersect Economic Index for August 2018 improvement cycle continues and remains well into territory associated with normal expansions. Our index is now at the highest level since December 2014. There are continuing warning signs of consumer over-consumption.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Economy

More from Steven Hansen


Steven Hansen

Steven Hansen


Research Brokers before you trade

Want to trade FX?