As people worry about drag from public sector austerity bringing the US down in 2013, Goldman’s Jan Hatzius makes an incredibly important point about another counterveiling point, which is that of the historically high Private Sector Surplus.
…underneath the fiscal drag the fundamentals in the private sector of the US economy are improving. The key force behind this improvement is the gradual normalization in the private-sector financial balance, i.e., the gap between the total income and total spending–or alternatively, the total saving and the total investment–of all US households and businesses, from levels that remain very high. When the private sector balance is high, the level of spending is low relative to the level of income. A normalization then means that spending rises relative to income, providing a boost to demand, output, and ultimately employment and income. The induced improvement in income then has positive second-round effects into spending.
Exhibit 1 shows that while the private sector balance has fallen a bit in recent years, it remains at +5.5% of GDP, more than 3 percentage points above the historical average. In particular, the business sector continues to run a large financial surplus, as capital spending has generally not kept pace with profits and cash flow. The surplus in the household sector–calculated as the difference between personal saving and net residential investment–is less exceptional by the standards of longer-term history, but quite high by the yardsticks of the last 25 years.
This recovery is slow, but there are plenty of tailwinds to kick in on the private sector side, as this chart nicely shows.
Another “fiscal” tailwind that doesn’t get discussed is state & local spending/hiring, which finally seems set to stop being a drag, for the first time since the recovery.
So although the Federal austerity is worrisome, it’s not the only game in town.
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