Revised Treatment of Disasters in the NIPAs and FAAsPreview of the 2008 NIPA Comprehensive Revision

Nicole MayerhauserNational Economic Accounts Data Users’ Conference, BEA

April 13, 2007

2www.bea.gov

Overview

▪ Current treatment of disasters Distorts the current production

measures of national income & personal income

▪ Proposed treatment of disasters Better measures of economic activity

related to current production

3www.bea.gov

Disaster losses in the NIPAs

▪ Losses of capital assets recorded as an increase in depreciation.

▪ Insurance payouts recorded as current transfer payments.

▪ Leading to swings in the measures of current production.

4www.bea.gov

Current treatment

▪ Capital losses increase production expenses (CFC)

▪ Insurance payouts increase in income of claimholder increase in production expenses for insurer

▪ Personal current transfer receipts insurance payouts for destroyed consumer

goods

5www.bea.gov

Current treatment cont.▪ Business income ( corporate profits, rental

income of persons, and proprietors’ income) are all affected by the amount of uninsured losses measured as the difference between the increase in deprecation less the increase in insurance payouts received.

▪ Net operating surplus is affected by the increase in CFC.= Value Added – Compensation of employees – Taxes on production and imports + Subsidies– Consumption of fixed capital

or= Business Income + Current transfer payments (net) + Net interest (paid)

6www.bea.gov

Reasons for change

▪ Depreciation defined as the decline in the current value stock of fixed assets as a result of physical deterioration, normal obsolescence or normal accidental damage.

▪ Insurance payments for disaster losses are not financed from current revenue of insurance companies.

▪ NIPAs more in line with international guidelines (SNA).

7www.bea.gov

Proposed treatment

▪ Record capital losses as other changes in volume of assets NOT CFC

▪ Record insurance payouts As capital transfer payments/receipts NOT as a charge against current

production expenses/income

8www.bea.gov

EffectNational Income

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2003 2004 2005 2006

pe

rce

nt

ch

an

ge

(%

)

Currently published Under proposed treatment

Personal Income

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2003 2004 2005 2006

Pe

rce

nt

cha

ng

e (

%)

Currently published Under proposed treatment

9www.bea.gov

Enterprise income

current proposed revision

Net operating surplus 2,878.3 2,981.1 102.8

Net interest 642.3 642.3 0.0

Business current transfer payments (net) 74.2 98.5 24.3

To persons (net) 45.7 33.4 -12.3

To government (net) 30.1 53.4 23.3

To the rest of the world (net) -1.6 11.7 13.3

Proprietors' income with inventory valuation and capital consumption adjustments 970.7 976.2 5.5

Rental income of persons with capital consumption adjustment 72.8 99.4 26.6

Corporate profits with inventory valuation and capital consumption adjustments 1,133.7 1,176.5 42.8

Current surplus of government enterprises -15.4 -11.8 3.6

Effect on net operating surplus and enterprise income (2005)(billions of dollars)

10www.bea.gov

Personal income

current proposed revision

Personal income 10,239.2 10,259.0 19.8

Proprietors' income with inventory valuation and capital consumption adjustments 970.7 976.2 5.5 Rental income of persons with capital consumption adjustment 72.8 99.4 26.6

Personal current transfer receipts (net) 45.7 33.4 -12.3

Less: Personal current taxes 1,203.1 1,203.1 0.0

Equals: Disposable personal income 9,036.1 9,055.9 19.8

Less: Personal outlays 9,070.9 9070.9 0.0

Equals: Personal saving -34.8 -15.0 19.8

Effect on personal income and saving (2005)(billions of dollars)

11www.bea.gov

Saving and net borrowing

current proposed revision

Net saving 7.2 96.7 89.5

Plus: Consumption of fixed capital 1604.8 1502.0 -102.8

Equals: Gross saving 1612.0 1598.7 -13.3

Plus: Statistical discrepancy 71.0 71.0 0.0

Less: Gross domestic investment 2454.5 2454.5 0.0

Less: Capital account transactions (net) 4.4 -8.9 -13.3

Equals: Net lending or borrowing -775.9 -775.9 0.0

Current account balance -771.4 -784.7 -13.3

of which transfer payments to the rest of the world (net) -1.6 11.7 13.3

Less: Capital account transactions (net) 4.4 -8.9 -13.3

Equals: Net lending or borrowing -775.9 -775.9 0.0

Effect on national saving and net lending (2005)(billions of dollars)

12www.bea.gov

Calculating disaster effects

▪ BEA will continue to provide the effects of catastrophic disasters on a quarterly basis.

As other changes in volume of assets in the fixed asset account.

As capital transfer payments for catastrophic losses in the capital account.

13www.bea.gov

Conclusion

▪ Advantages of new treatment: National income will better reflect

economic activity related to current production.

Provides a better picture of capital account activity: funding for replacing capital investment will now be aligned with recorded capital investment.