Economic Report President

these distributions do not represent income from current production,and the revised data correctly exclude them from income. The revisionlowered the measured personal saving rate, and by a greater amountin more recent years because capital gains distributions by mutualfunds were greater. However, the revision had no effect on privatesaving, because the markdown of personal saving was automaticallyoffset by an increase in the measured undistributed profits of themutual fund industry.Interest Rates and ConsumptionChanges in interest rates affect household spending through variouschannels. Consider a decline in rates. This tends to boost the value ofstocks and bonds, which has a wealth effect on consumption as discussedabove. In addition, lower rates encourage spending on houses,automobiles, and other durable goods often bought on credit, whilereducing the return on new saving. Moreover, a decline in interestrates augments homeowners’ cash flow by reducing payments onadjustable rate mortgages and spurring mortgage refinancing. At thesame time, however, lower interest rates work to reduce spending inseveral ways. Household cash flow is diminished by a drop in interestincome, and people who are saving to reach a target level of wealthneed to save more to reach that target. On balance, lower rates probablystimulate household spending, and higher rates probably dampenit, but the magnitude of these effects is unclear.Nominal interest rates on Treasury securities reached unusually lowlevels last year. For example, for the year as a whole, the average10-year Treasury yield was the lowest since 1967, and at the peak ofthe financial market stress in early October the 10-year yield touchedits lowest value since 1964. Real Treasury yields (as measured by thedifference between nominal yields and survey measures of inflationexpectations) were also low, although less exceptionally so. Interestrates facing household borrowers did not fall as sharply as did Treasuryrates last year; for example, interest rates on consumer loansfrom commercial banks were only slightly lower in 1998 than in 1997,and credit card rates were roughly unchanged. But rates on fixed ratemortgages averaged more than ½ percentage point lower in 1998 thanin 1997.Financial Conditions and Business InvestmentFor several years through mid-1998, businesses enjoyed readyaccess to external funding on favorable terms. This circumstance wasone of the factors encouraging the brisk pace of capital investment, asreported in the following section. Last year’s sudden flight to qualitychanged this situation abruptly, raising borrowing costs for some businessesand limiting others’ ability to borrow. However, one should notoverstate the impact of these developments on economic activity. As68