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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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Listed below are links to blogs that reference Are American Consumers Responsible For The Large Trade Deficits? Some Further Thoughts :
Which came first: the savings chicken or the deficit egg?
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.[Read More]
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