Although business saving is at a record high in absolute terms, combined household and government saving is negative for the first time in the post-World War II period.
Business fixed investment spending is low in absolute terms and is at a record low in relation to business saving, perhaps because of a low return on capital.
U.S. businesses and the rest of the world are saving so that U.S. households and government units can spend more.
The relatively large use of total U.S. saving for household and government spending bodes poorly for long-term U.S. economic growth.
The good news is that business net saving is at a record post-World War II high. The bad news is that businesses are reinvesting relatively little of their saving (undistributed profits) in themselves.
Businesses are spending only about 50% of their net saving on net investment (that is, above the consumption of capital) in plant and equipment – the smallest proportion in the post-World War II period. (Because I am not a hedonist, all data used in this commentary are in nominal terms.)
Despite record business saving, U.S. total domestic net saving has fallen sharply in recent quarters in absolute terms. Relative to gross national income, total net domestic saving is the lowest since the early 1930s, when it was negative.
If total domestic net saving has fallen, but business net saving is soaring, then, by definition, combined net personal and government sector saving has fallen. For the first time in post-World War II history, combined personal and government sector net saving has moved into negative territory.
Record federal budget deficits and households continuing to party like it’s 1999 – that is, saving very little – is what has put combined personal and government saving below zero.
Throughout most of the post-World War II era, the sum of personal and government net saving was higher than business saving. The implication of this is that the household and government sectors were curbing their enthusiasm for current spending so that businesses could build up their capital stock – the true source of wealth and future rising standards of living.
But not now.
There is another source of saving for the U.S. economy – the kindness of others who reside abroad. And, indeed, others have been kind of late. Net foreign saving in the United States is a close cousin of the U.S. current account deficit (multiplied by minus 1). As net domestic saving has sunk in recent years, net foreign saving destined for the U.S. has soared to record levels.
Despite the record amount of saving coming to us from abroad, our total net saving – domestic plus foreign – in relation to net domestic product is now only about 7% compared to a post-WWII average of 9-1/2%.
By now, I guess it is no surprise to you that net business fixed investment as a percent of total net saving – domestic plus foreign – is currently low. The median percentage in the post-war period is 43%. Currently, the percentage is 28%. Just to complete the dismal business investment story, consider the net business fixed investment as a percent of net domestic product. The current reading is about 2.6%, compared with a post-war median of 3.9%.
In sum, U.S. businesses, along with the rest of the world, are saving so that U.S. households can spend more on SUVs and "McMansions" and U.S. government units can spend more on whatever governments spend on.
That’s terrific for now. But will these SUVs, McMansions and government spending programs allow us to grow faster in the future? If not, will we not have to suffer more of a decline in our future (or our children’s future) standard of living when we have to service our foreign debt, or maybe even have to pay down some principal?
One last question. Why are businesses so willing to forgo investment spending so that households and governments can spend more? Could it be that the expected return on business capital is very low as a result of the massive malinvestment of the late 1990s? The answer is "yes," if 10-year Treasury TIPS yields can be viewed as a proxy for the real return on capital inasmuch as they currently are yielding only a little over 1-1/2%. What does that say about the health of the U.S. economy?
Paul Kasriel is director of economic research at The Northern Trust Co., Chicago. He can be reached at plk1@ntrs.com.
April 2, 2004 Small Business Times, Milwaukee
