Brad Setser

Brad Setser: Follow the Money

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Savings is still something other countries do

by Brad Setser
July 28, 2005

Which is good, because it looks like the US will need more of the world's savings to finance a pick up in investment. 

The US housing market.  Still strong.  Record sales of new homes in June

US residential investment.  Presumably still strong.   It certainly is driving the economy:

Residential investment amounted to $710 billion at an annual rate in the first quarter of this year, accounting for six-tenths of a percentage point of the 3.8 percent growth rate for the economy.

US business investment.  May be picking up

Business investment in new equipment is speeding up after companies limited their orders to work off excess stockpiles from the first quarter, economists said

I don't think there is much evidence that consumption growth is slowing.  Some of the surge in demand for durable goods comes from exports, but a lot of it is coming from inside the US.  Strong consumption growth implies no growth in household savings.

All this good news for the US economy looks set to generate a further expansion of the US current account deficit.  Investment seems to be picking up but savings is not, so the gap between US savings and US investment will rise.  The US government deficit (including the social security cash flow surplus) is down slightly, but I suspect the improvement will at best offset the (expected) fall in household savings.  

Conclusion: an imbalanced global economy will get more imbalanced in the second half of 2005.

The China's current account surplus: still rising.
The United States' current account deficit: still rising.
European domestic demand: still not growing.
Oil exporters are importing more, but their spending still lags their rising export revenues. Their savings surplus is still growing.

The pick up in business investment is welcome.  But I would be much happier if US savings was financing US investment, and there was more evidence that the US consumer was not the only engine of the world's demand growth.   Put differently, I would rather see rather see 30% plus y/y growth in Chinese imports and 15% y/y growth in Chinese exports than 15% y/y growth in Chinese imports and 30% y/y growth in exports.

Despite the brief excitement created by the dollar's fall last year, it kind of feels like little fundamental has changed (economically speaking) since last summer, apart from the fact that oil is now quite a bit higher, the US current account deficit is a bit wider, and the renminbi is a worth a tiny bit more.

One small reminder: at around 91.5, the JP Morgan broad dollar index is only a tad lower than its 1990-2003 average of a bit over 93 (for a more comprehensive assessment of the dollar's current state, see this Menzie Chinn paper).   To bring the US trade deficit down, the dollar almost certainly will need to fall to levels well below its historical average – or for that matter estimates of "fair value" based on data from the past 20 or even 25 years – so that export growth outpaces import growth by a wide margin.  Dollar depreciation alone won't do the trick, but without dollar depreciation – as Ted Truman has noted – it will be hard to sustain overall US growth as US demand growth slows, as it must, at some (far distant?) point … .   

3 Comments

  • Posted by Anonymous

    “Despite the brief excitement created by the dollar’s fall last year, it kind of feels like little fundamental has changed (economically speaking) since last summer”

    The view also of Paul Volcker:

    “The circumstances seem to be as dangerous and intractable as any I can remember,” Mr. Volcker said Thursday, repeating an earlier warning in a February speech. “If people lose confidence in the dollar as a store of value, or lose confidence in the political strength of the United States relative to other countries, there is going to be trouble. I’m not saying a crisis is inevitable or that an orderly adjustment is impossible, but at some point big adjustments will have to be made.”

    http://www.nytimes.com/2005/07/23/business/worldbusiness/23dollar.html?pagewanted=print

  • Posted by Steven M

    “But I would be much happier if US savings was financing US investment, and there was more evidence that the US consumer was not the only engine of the world’s demand growth.”

    I agree completely. Viewed simply as an objective economic factor, mass comsumption with no saving doesn’t sound so bad. Viewed as an aspect of our policy, it is very bad. We need to be self-sufficient…and not dependent on foreign countries for capital and for funding sources.

  • Posted by Silent E

    DC’s real estate bubble is bursting. Home sales are slowing and houses are staying on-market much longer than in April 05 – 6 weeks now vs. 2 weeks then. Houses are not selling above list. I’ve seen list prices *reduced* by 5% after several weeks on-market, even though the initial asking price was the SAME as April sale prices for substantially similar homes in the same neighborhood.

    It ends this year…