U.S "Excess" Household Savings and the Balance of Payments
A comprehensive look at how saving and spending has shifted across different sectors of the American economy.
I had originally planned to publish this note last week. Unfortunately, a positive Covid test at our daughter’s daycare has meant that we have needed to keep her home since last Thursday. Fortunately, everyone is doing okay and we should hopefully be back to normal by next week.
Many other parents are either dealing with similar situations right now, or have been forced to deal with it repeatedly throughout the pandemic. Aside from the obvious costs, the loss of childcare has also taken a toll on the economy’s ability to produce the goods and services we want to consume.
The good news is that this also means that there is a lot of latent capacity waiting for the return of normality, whenever that happens. The virus may have inflicted long-term damage on our productive capabilities, but many of the most significant limitations on output—including school closures and other constraints on childcare—have the potential to vanish quickly. Policymakers should avoid undue pessimism about the potential of the post-pandemic world. Anyhow, onto the main event.
In two previous notes, I looked into the sources and uses of the $2.4 trillion that U.S. households have saved since February 2020 above and beyond what would have been expected based on the pre-pandemic trend.
But households are only one part of the broader economy. So in this note, I am going to offer a broader analysis of U.S. national savings and investment since the pandemic began. That means looking at corporate capital spending and profitability, at budget balances across multiple levels of government, and at America’s trade and investment with the rest of the world. All of the pieces have to fit together—and can only be understood as part of a coherent system.
The key points:
American businesses are making more money than ever, with profits after taxes up by 27% compared to the end of 2019. That hasn’t (yet) translated into a commensurate increase in investment, which is barely higher than before the pandemic. However, both the booming profits and the disappointing capex could be illusions caused by limitations in the data.
Despite being flush with cash thanks to soaring tax receipts and generous aid packages from the federal government, U.S. state and local governments have been cautious about spending more. Instead, they have chosen to bolster their balance sheets and hoover up $626 billion of U.S. Treasury bonds.
Even though U.S. households, businesses, and state and local governments have been conservative in their spending relative to their income, the current account deficit—the gap between spending and income for everyone in the U.S. as a whole—has nearly doubled. That’s predominantly due to the persistent slump in foreign demand for U.S. exports (down 11% in inflation-adjusted terms since 2019Q4) rather than to unusually rapid growth in U.S. demand for foreign imports (up only 5.5%). Thus, while spending in the U.S. economy as a whole has been broadly consistent with the pre-pandemic trend, income has been lower due to weakness abroad.
The U.S. federal government effectively shielded the U.S. domestic economy from that foreign weakness at the cost of an even-larger budget deficit. The surge in federal borrowing needed to be more than enough to match the increase in private saving and in state and local government saving in order to offset the decline in U.S. income earned from the rest of the world. If that hadn’t happened, U.S. private sector incomes and state and local tax receipts would have been lower, which would have translated into some combination of lower saving and lower spending.