The financing gap is the difference between capital expenditures and cash flow. Another way of putting it is that it measures the dependence of business on financing for growth.
The financing gap turned sharply negative at the end of last year. This negative financing gap indicates that the business sector as a whole is generating enough cash to purchase capital expenditures without borrowing. This supports the claims of banks that demand for business loans has declined. But that isn’t necessarily good news for the economy.
We’ve overlaid this with the unemployment rate to indicate that the negativity of the financing gap doesn’t tell us much about underlying economic conditions. The gap turned sharply negative in late 2005 as unemployment was falling, indicating a booming economy that generated a large cushion of liquid assets for companies to spend on capital expenditures. This time around the negative financing gap, is very different—most likely generated by a decline in expenditures rather than excess cash flow. In short, this is a recessionary negative finance gap.
We’ve actually never seen anything like this in recent memory: a growing negative financing gap coupled with growing unemployment.
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