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July 26, 2005

Are American Consumers Responsible For The Large Trade Deficits? Some Further Thoughts

I had many good comments on my post from a few days back, wherein I suggested that the recent drop-off in the personal saving rate in the United States has been more a result of events that have led to large trade deficits than large trade deficits the result of the low saving rates.  James Hamilton made one observation -- endorsed by pgl who also posted on this topic over at Angry Bear -- that provides me the opportunity to follow up on my initial comments.  James says:

... the decline in the U.S. saving rate has been a continuous process for the last 20 years. It seems to me we've seen enough ups and downs in real interest rates over that span to make it hard for me to see as clear a connection as the one you're describing.

I should clarify that I am not attributing zero role to a "consumption binge," especially if that term is meant to describe any changes in consumption not attributable to interest rates.  I certainly believe that the relative strength of U.S. economic growth versus other developed countries has had a role in driving our trade deficits, as had asset-appreciation representing changes in wealth not captured by income flows.  I might even factor in stimulus from tax cuts emphasized by pgl (but will note at the same time that I am not generally a fan of changes in tax policy driven by motivations other than long-term structural reform).   What I was saying is that I struggle with a story in which autonomous or policy-induced consumption spending is the centerpiece of the current account story since, say, the end of the 2001 recession.   

If you are looking for a consumption binge, the period from 1997-2001 looks like a better candidate than the period since:


It is certainly true that the consumption share has remained at an historically high level, but it has not accelerated in the past several years -- even as the trade deficit continued to grow relative to GDP.

The National Income and Product Account measure of consumption does not, of course, include the purchase of new homes.  That's a category of investment, although some may want to ignore that accounting formality and associate residential investment with consumption.  If you do that, you might find the "binge" you are looking for...


... but what you are seeing is exactly my point: It is precisely the really interest-sensitive part of household-related spending that has expanded unusually in the post-recession period.  A generalized consumption binge it is not (in the eyes of this beholder, anyway). 

James takes not much consolation in this, and I'm not saying he should (although I do lean to Mark Thoma's assessment).  I've said many times that if and when long-term real interest rates rise -- which, heaven help me, I still believe is going to happen sooner or later -- the housing market will take the hit.  That need not be such a problem, of course, if interest rates are rising in an environment in which whatever has been restraining business fixed investment ceases to be. That it won't worries me a lot more that than the low personal saving rate per se. 

One interesting aside. In my previous post I bemoaned the fact that firms have been slow to spend the funds that they have at their disposal.  But the flip side of this is that they are engaging in a relatively large amount of saving.  The result of this is that net private saving rate -- the sum of personal and business saving rates, defined relative to GDP -- has actually risen since 2001:


If you believe that households "pierce the corporate veil" and treat business saving as if it is being done on their behalf, then consumers have actually reversed the trend of the past 20 years!

July 26, 2005 | Permalink


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» Which came first: the savings chicken or the deficit egg? from Econbrowser

David Altig at Macroblog raises some very thoughtful questions about the relation between the drop in the U.S. saving rate and the current account deficit.

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Tracked on Jul 30, 2005 10:46:09 PM


I suspect that we need to go both global and local on this one.

local: given the level of mortgage rates, the lose criteria of lenders, the need for households to rebuild assets damaged by the 2000-01 market crash - including their 401K etc, and their probable low appetite for risk these days, it seems logical that we observe both a consuming restraint and investment in hard, tangible assets such as housing. Where consumers took dangerous and possibly insane risks is when they refinanced fixed mortgages with variable rate mortgages some time ago. If they have not locked in the low present long term rates, they may be in for a lot of trouble regarding the affordability of their properties in the future.

Conversely, D. Wessel's point in the WSJ regarding low corporate investment - eg a long digestion time for the excesses of the late 1990's - sounds interesting too.

global: US interest rates are not low. Global interest rate levels are low and US rates, short and long, are rising quite rapidly in relative terms. The alternative safe investment to US Treasuries is esssentially JJBs or Euro area bonds.

Global investors have likely become more risk-adverse than they were pre-2000 as they lost fortunes when corporate spreads exploded upwards, and thus the demand for government bonds globally is rising, "all yields being equal". Note as well that the rapid expansion of private retirement savings vehicles in Europe is de facto (and very often by law) heavily tilted towards Govies or AAA signatures. This shows up in rapidly falling yields in the euro area. US yields are simply remaining constant. In this sense, one might argue that the crowding out effect is there in the US whereas a crowding in effect is there in Europe.

So, my question would be, are we really talking about a global savings glut, or are we describing a global investment dearth.

Posted by: 4degreesnorth | July 27, 2005 at 04:37 AM

While we're on the subject of national savings rate, let me ask the question I've asked of other econbloggers: for the national savings rate to rise doesn't the savings rate among the top income quintile (or decile) need to rise? Or, said another way, since much of the income growth has been in the top quintile (or decile) for quite some time now doesn't much of the increase in savings need to come from that group, too, in order for the national savings rate to rise?

Posted by: Dave Schuler | July 27, 2005 at 01:06 PM

Bernard -- Nice point. I vote for the investment dearth.

Dave -- The arithmetic answer is "no" -- the increase in saving can come from any part of the income distribution. But I think that the other way to think about your question is this: Has the decrease in saving rates been associated with the upper tail of the income distribution. The answer there seems to be yes -- as documented in this study feom the Federal reserve Board: http://www.federalreserve.gov/pubs/feds/2004/200432/200432pap.pdf
These guys find that the dip in savings rates since the mid-80s has been concentrated in consumers who owned stock. There was no change in the behavior of non-owners. So, the answer to your question then becomes yes: Saving rates would recover if the upper income groups -- they are the stock owners -- reverted to their previous behavior. Of course, we might want to ask whether that would, indeed, be a good thing, as off-the-shelf economic theory suggests they are behaving more-or-less as they "should."

Posted by: Dave Altig | July 27, 2005 at 11:10 PM

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