Thursday, August 27, 2009

Where's the Investment?

I have heard from a number of readers that the lack of consumption in the current environment is not as troubling as one might expect. The thought is that rather than consume, individuals are increasing their level of savings, which is just a form of future consumption (and the opportunity to consume MORE later outweighs the benefit of consuming LESS now).

Which makes sense, except the data does not support this theory. Looking at the data, we see a HUGE decline in investment (and thus a HUGE decline in savings if you assume I = S). How large? Investment is down massively from its 2005 peak across the board and is now below the level of investment seen in Q2 1997.

Twelve years of growth in investment gone? What is happening? Well, the savings that has been reported is not occurring as the numbers imply. Savings is calculated as the difference between income and consumption. What is missing is interest payment / debt repayment. As described by reader Angry Saver in a previous post:

The C+I... formula is simplistic and rests on flawed assumptions. It is an accounting identity that does not always reflect the facts in the real world. End demand by consumers is the key. When end demand shrinks, so does the pie. When future income shrinks, so does the pie. Adding gov't debt will create false demand and may keep the debt system from imploding, but it will also limit future end demand.

(We've) spent too much based on misperceptions of future wealth (wall street lies). Much of the so-called investment/savings were borrowed from abroad and were actually malinvestments as they exceeded ability to pay and were not based on end demand. The bills for all that excess/mis-spending are now due. A rude awakening. Debt repayments and debt defaults at the household level will accelerate.

Despite propaganda to the contrary, U.S. consumers are now realizing that their future incomes will be less than previously thought. Lower savings/investment is to be expected as our economic future will be smaller than previously assumed.

Source: BEA


  1. I think that's absolutely correct- and most likely the most important factor as far as any possible consumer driven recovery.

  2. Why on earth can't I see this kind of data elsewhere ? Am I blind ? Did I miss it in The Economist ? On Bloomberg ? In Business Week ? It looks like to me that they prefer ideological mumbling instead of cold hard facts.
    That being said, I know I'm not that clever and I might have missed it.

    Anyway, thanks for the post Jake =) (and Angry Saver)

  3. Gabriel - our buddy Jake is chasing down his own data and re-formatting it. Which I've found myself forced to do as well. As Jake knows my shibboleth is yoy data which, after much hammering (some of it by me), more are using.

    If you go the STL Fed's site you can go to FREDII and get most of the data you need. And Joseph Ellis's "Ahead of the Curve" will help you be clever. Also Mike Lehman's "Using the WSJ".

    The Fed site also has a pretty good graphing program that lets you customized and see about anything they've got.

  4. Jake - may be comparing kumquats to turnips here. Consumer savings doesn't automatically show up as real asset investment. Plus, despite the increased savings on a period basis, somebody's pointed out debt is absorbing all that.
    Eventually we'll get back to a period of more saving flowing (Saylike) to real investment and the economy will grow but I see that taking a decade.
    BtW - are we also looking at a stock vs flow problem here ? The nat'l income data tells you what the flow into investment is not what happened to the stocks of assets. I suspect if you look around all the houses are still there, and the plants, malls, etc.
    Finally, let's remember investment and hiring are laggards because no rational executive increases capacity w/o anticipating future demand.

  5. dblwyo- good points. this only flows, but as you know new flows is future stocks (and needed to replace existing stocks of capital that is decaying).

  6. about these malinvestments...are they really?

    ignoring pressures from foreign creditors, if the fed can top off the bad loans made by the banks and then remove the liquidity once velocity picks up, nobody takes a loss on the houses built in excess, right? i guess the malinvestment is in the squandered materials, but that's really not much in the scheme of things.

    maybe modern monetary policy did discover the free lunch after all.

  7. you call what we're currently experiencing free lunch?

    10% unemployment rates, reduced wealth, lower income, and greater debt doesn't seem free.