Drop the corporate saving rate, please…
Update: The term corporate savings below refers to excess saving, gross saving over gross domestic investment, as a percentage of GDP. This is the defined 3-sector financial balance model (referred to below).
The Federal Reserve Flow of Funds showed a third quarter shift in the financial sector balances: the corporate saving rate declined 0,25% to 2,7% of GDP; the household saving rate fell 0,13% to 3,8% of GDP; the current account fell 0,11% to 3,5% of GDP; and the government increased its saving rate 0,27% to -10,0% of GDP.
Basically, the government was able to increase saving slightly, even as foreigners increased surpluses against the US, at the cost of reduced household and firm saving.
The chart above illustrates the 3-sector financial balances approach, which is the identity that the private sector and public sector saving rates must equal that of the foreign sector (the current account). The private sector is broken into the household and corproate sectors. For a discussion of the 3-sector financial balances, see Scott Fullwiler, Rob Parenteau; and I’ve written on this as well.
(Note: I am in Deutschland, where the keyboard and number system are slightly different from that in the US – so for this post, I can write ß whenever I want to, but I won’t, and all numbers with “,” represent an American decimal point, “.”. Funny thing is, when I use the Blogger spellcheck here, everything is highlighted yellow, so I plead “in Deutschland” for any misspellings :))
Some people may see the large government deficit, still -10% of GDP, as the ‘problem child’ of the sectoral financial balances. Me, I see the government deficit as a red herring of the corporate saving rate, which remains stickily in the 2-3% range. Until the corporate saving rate falls markedly, let’s say to zero or below, the unemployment rate is to remain high, and the household deleveraging process slower than would otherwise be if wages and disposable incomes were growing more quickly.
The chart illustrates the corporate saving rate and the unemployment rate, both have an 84% correlation. Therefore, adjusting for the standard deviations, corporate saving and the unemployment rate move roughly in sync. When the corporate saving rate is negative, firms purchase new capital goods and hire labor for production faster than they accumulate financial assets, thereby reducing the unemployment rate. In contrast, when the saving rate is positive, firms are investing in financial assets (or consuming capital at a higher rate) faster than they are increasing the capital stock and labor force, thereby increasing or leveling the unemployment rate.
In a very simple linear regression model (chart below), the relationship betwen the corporate saving rate and the unemployment rate exhibits an R2 of 70%. Accordingly, reducing the corporate saving rate to zero corresponds with a near-3ppt drop in the unemployment rate to 7%, all else equal, of course.
So one way to quicken the household deleveraging process is to reduce the corporate saving rate. Reducing the corporate saving rate corresponds to a falling unemployment rate, so that workers accrue SOME pricing power (they have none at this point).
Another way is to increase the fiscal deficit, to Mark Thoma’s point in The Fiscal Times this week. The correlation between the government financial deficit and the unemployment rate is -92%.
This is where the two come together: fiscal policy needs to provide incentives to lower the corporate saving rate.
Let’s get back to the FIRST chart..Borrowing Growth by Sector…this chart actually compares 4 Non-financial growth rates to ONE Financial business rate..right away we are getting a sniff of what the the agenda is here!
Second…businesses don’t save..and invest instead in equipment and employees..when it makes sense to do so! Duh. So Ken’s solution to FORCING businesses to do the unemployed a favor??? We don’t know! Because this article is all about guilt by inference. Look it up Ken!
The answer to our severe unemployment problems?? People need to begin taking jobs that are available..not FANTASY jobs they’s sent resumes in for..but REAL jobs. And NOT for the money they once made. No 99 week unemployment…no phony job hunts!! Cruel and unusual? Tough!
There is one critial element missing from this discussion — demand. Busninesses will not take their cash and spend it on infrastructure or labor when there is insufficient demand for their goods and services. Add in the fact that the capacity utilization is currently at about 75% it is unlikley that we will see employment growth any time soon.
The question to be asked is: if demand is down, where is all that cash coming from? Yes some comes from sales of inventory, but I have the feeling that much of the cash balances are coming from speculative investing of company funds. Speculative investment does not, conraray to conservative opinion, create jobs or wealth.
Finally, to Greg’s comment: I can tell that you are not unemployed nor have you been recently. The market is bleak. But hey, it’s almost Christmas so it is time to ask “are there no prisons, are there no workhouses,…if they would rather die then they should and decrase the surplus population!”
I agree with your comment to Greg. Job creation beyond Mickey Ds is bleak and the jobs do not exist to be taken yet. I do see job growth occurring in the activities I see at my mailbox.
I work as a CPM, CPIM, and LSS Purchasing Manger for NA at a tier one and also a power tool supplier component supplier. What I have sen for mosfest manufacturers is a 100-200% increase in lead times to offset the need for capacity. Lead times have gone from 12-16 weeks to 26 -99 weeks. This is a classical problem that anyone in manufacturing has seen before. Cut lead times and the demand goes way if it is just led time driven. It is not lead time driven in our case as we are forecasting absolute needs for “allocated mosfets.” Typically, if there were no other buyers, I would tell the supplier to cut lead times and the backlog would go away. In this case, it will not work as manufacturing are not adding capacity.
What we have seen is lengthened lead times, controlled capacity, and price increases for the parts. Demand is not down in our industry and has increased along with prices. There is a need for more capacity which has not been added in the last year and will not be added for a year or so to come. Hence get in the queue, forecast your needs for 2011 and wait for your allocation. “another cartel?”
I beleive the demand is there.
What jobs? The shrinkage in the Civilian Labor Force as compared to the Civilian NonInstitutional Population is historic and has remained low for almost a decade now. Job Creation has not kept up with population growth nor has it returned to a level experienced after the 2001 recession. It is so bad, people have dropped out and are counted in Not In Labor Force or are under utilized in part time jobs, etc. to get by. Since part time labor is counted by the BLS, I suggest the problem is far more extensive than what is reflected.
What you have suggested in your last paragraph has already occurred. people have come off of Unemployment (no tier 5) and have gone on to welfare, the work houses are full, and the prisons at capacity. The last vestiges of a safety net such as SS, Medicare, Medicaid, Food Stamps, etc. are slowly being dismantled by this administration and the party of “No.” Perhaps Soylent Green is the answer for an excessive capacity of people?
At I detailed below, the demand is there, capacity is at its theorectical limit, and companies are maximizing profits on present infrastructure. Companies are not adding capacity to meet demand in spite of all the corporate welfare lavished on them now and in the past which for all intents and purposes the expense has superceded the cost of unemployment.
What is the P-Value for the data displayed? Just curious.
Doing some back of the envelope calcs, adding 380k employed per month and growing the labor force at a reasonable rate drops the unemployment rate to 9,5% by June of next year. There’s mass utilization of labor out there: see the employment to population at 58,2%, below that in the 1980s and falling since September…again (http://research.stlouisfed.org/fred2/series/EMRATIO?cid=12<9.
In the service sector, it’s mostly the well-educated and skilled workers that are finding work. In fact, there’s a fair bit of shuffling going on in my field, financial services, at the top. We just lost our CIO to another venerable firm, for example – but the job opportunities effectively stop there, in aggregate. There has always been a descending trend in employment opportunities according to education level, that’s a structural problem in the States; but the recession has furthered the wedge between the unemployment rate amongst education levels. (http://www.newsneconomics.com/2010/10/retraining-workers-wont-work.html).
@Greg: There’s no ‘fantasy’ job for many because there simply is no ‘job’.
Nicely done Rebecca. Would be interested in the line items from the Flow of Funds you are using for your corporate financial balance definition – send me an e-mail when you get a chance. The chart on the unemployment rate and the corporate financial balance is impressive. Until policy makers recognize and address what is holding back reinvestment rates in their nations, they will find tax revenues falling short, and they will find it hard to improve their trade balances (except through fiscal retrenchment that collapses import demand). There are several working papers at the Levy Institute website trying to tease out statistically the leads and lags between sector financial balances and economic growth which may be of interest.
I’m not sure how widely distributed the corporate savings rate is. We have a few firms like Apple, Microsoft and Cisco that sport $40B or so of cash or cash equivalents on the balance sheet. But I don’t think things are quite that impressive as you work your way down the Russell 2000.
Then in the FIRE sector we changed over to mark-to-your-hearts-desire-accounting to insure we’ve front loaded the bonus pool and hiring bonus incentive, but to be frank, many of us are not all that thrilled about that.
Then the smart money is betting all the money goes for stock buybacks, and maybe some M&A next year so I doubt we end up with the re-industrialization of America.
However, Walmart seems to have decided to build a bunch of little stores instead of being satisfied with just a bunch of big stores, so maybe something happens there in case McDs has trouble pulling the whole country back to full employment.
It seems that the demand may be there in manufacturing and goods producing, especially given your anecdotes above and if one looks simply at the bounceback in labor hours to proxy the marginal demand: http://research.stlouisfed.org/fred2/series/AWHAEGP?cid=11
But this is a very different story from the service-producing industries, which accounts for the lion’s share of the payroll: hours and job creation remains extremely muted, http://research.stlouisfed.org/fred2/series/AWHAEPSP?cid=11
When I read the NFIB small business survey, I’m less than optimistic that ‘demand is there’. The survey seems to indicate continued expansion, but still uncertain outlook for sales and revenues. http://www.nfib.com/Portals/0/PDF/sbet/sbet201012.pdf
That’s the real problem, uncertain economic outlook. The government needs to step in here before the labor market turns structurally depressed. Based on your comments over time, I believe that you would agree.
Greg is apparently living in the Republican fantasy land where there are jobs aplenty for everyone if the lazy bums would just take them. In fact, there are so many jobs in this fantasy land that the people stuck in a job that doesn’t pay the bills should have no problem finding those second and third jobs they’ll need to make it and they ought to be damned happy to work them.
Are you serious? You’re doing a simple regression of unemployment on corporate savings and interpreting it as a causal relation? Who taught you econometrics?
Corporate investment is known to be strongly procyclical. If this procyclicality exceeds that of profits, we’ll inevitably see a relationship between recessions and corporate saving. All you’ve done, then, is show that one phenomenon tied to economic bad times (unemployment) is correlated with another phenomenon tied to economic bad times (elevated corporate saving rates).
If you don’t see how astonishingly stupid your post is, keep in mind that you could use the same logic to show that federal budget deficits cause unemployment.
Run: I think your analysis of lead times is interesting. However, are these lead times for domestic US based corporations or are they from yet anohter off-shore supplier? If they are from places like China there is no surprise at the extension of lead times as more-and-more companies outsource. If these are domestic suppliers, that says that the management is unwilling to hire even temporary workers.
Random: The comparison is too simplistic. However, as I noted in the end of my original post, are the savings from the profits derived from sales or are they being generated by the internal trading departments? I know a few people in some corporations nearby and I’ve heard that the internal trading folks are making a killing and getting nice bonus payments based on their results.
My fear is that we are entering a phase of the economy where the actual production and provision of goods and services is taking second place to market speculation. We live in a world where speculative investing is yielding maximum profits and the “smart money” is following them down the golden path. I’m waiting for the next “Tulip Bulb” because that is very similar to each of the most recent market bubbles that burst.
The classic lead time issue was always extending the lead time to improve supply. We both know this is not the solution to a typical capacity issue. These are not new industry where 4-5 weeks of ocean time would impact the supply and neither does our supply come by ocean as it is often the last minute in which they are shipped by air – courier. It is very much a capacity issue and the lack there of for the international who are maximizing profits.
Your fear is similar to what I have said here and on other sites. It is more profitable to invest in non-labor intensive business whether service or product producing. This extends back to the 1978 SCOTUS decision First of Omaha versus Marquette. Spencer does some excellent charts showing that shift from labor to capital of productivity gains. The trend you are describing is older than just a year or so. Not much has changed from the 2008 collapse.
Nice talking with you and Merry Christmas.
Thanks for the return comment. It was probably kharris who mentioned the inventory fill going on with automotive. No one bought over the last few years and now their is a frenzy of buying going on and they are building towards the 90 day levels again. Our ride may end once they reach 90 days. Once demand decreases lead times will collapse. We are going for market share to ride this out.
We all know the issues. What would you suggest we do? Sandwichman believes in shortening the work week to employ more people and give them more leisure time. My own thoughts and George’s (below) believe he problem is deeply rooted in he skewing of productivity gains away from labor and towards capital, Hence, why invest in labor intensive business when I can make more in interest and investing in CDO, CDS, naked CDS, etc.? Random appears to miss your point on LBOR.
Rebecca, what do you believe the solution is?
Not sure if you can read too much into power mosfet lead times or electronic component lead times in general. The past couple years we and China have been ramping up solar panel production and China now surpasses the US in output. This caused a shortage in polysilicon capacity. I just read China completed a massive government push to fast track the building of new polysilicon plants. Normal construction time is 2-3 years, but they just did it in one year.
As far as semi’s in general, the preferred biz model in Silicon Valley is the “fabless” model. With a few exceptions like Intel, most prefer to do design in house, then outsource the actual chip fab to somewhere like Taiwan Semiconductor. China also has a semi company that has huge new fab capacity.
I think the problem in the US is we have decided we will only do “brainy” stuff in this country, like chip design, and design of CDO and CDS paper. ROI calcs take a backseat to this philosophy, because investing in plant and equipment is not necessary anymore, someone else seems willing to do it and let you use it. And it probably is cheaper to “buy” rather than “build” due to labor cost differentials.
And if you need the whole wave soldered, surface mount PCB, that went you know where long ago.
I had not considered solar as having created an issue with mosfets on the on the poly-wafer side. That would explin much of the issues for availability. Our mosfets are fabbed in one country and packaged in another. Italy, Malaysia, China, India, etc. appear to be the big players.
We are an international manufacturer of smt products, now have 3 lines and are installing a 4th smt line here in central NY. AMD has started construction in Malta NY also. Very little Labor involved in this type of manufacture. We are carving a niche in automotive and supply more than just domestic. Because of our quality, the product is highly sought. We will open a Mexico plant to be near European manufacturers soon.
One usually goes to China for reasons other than Labor content.
The polysilicon-PV solar connection has been in the news now and then. A google should turn it up.
Haven’t followed the PCB/SMT biz that closely lately. Starting in the later 80s I noticed flextronics and all the big boys head for the general direction of Asia and assumed it would continue.
Allen Bradley was an interesting counter trend. They pulled production of programmable logic controller boards back from malaysia in the early 90s and put the line on the 15th floor of corporate headquarters. It was highly automated, surface mount tech had just become available, and they employed 15 hourly people per shift and ran 3 shifts. Not labor intensive, but capital intensive.
Of course then they had to stick the board in the case, hook up displays, power supplies, power cord, put the knobs on, etc…that all got done elsewhere. Mexico I think.
Run, et al.,
I think we have drifted away from the original article and the issue of domestic US enemployment as related corporate savings accounts.
I can understand the lead time issues in the supply-chain that Run describes as China is at or near full capacity in many industries regardless of the world-wide recession. The problem debated in the article is US based unemployment. Here, in the USA we are dealing with an industry average of about 75% capacity utilization. That means that domestic US corporations are running far below capcity while many are posting record profits and puutting said profits in the bank.
If non-US capcity utilization is running full-bore why aren’t companies coming to them for materials? Perrhaps in our zeal for outsourcing we have relinquished our manufacturing capabilities to the point where we are captive to non-domestic suppliers.
The reality is that until demand increases domestic US corporations are unlikely to spend any of the saved profits to eitehr hire people or increase productive resources. That means we are in for a very prolonged jobless “recovery.”
If we “financialize” our total economy we run the risk of the same fate that befell Spain, The Netherlands, England and other nations that got the brilliant idea that trading stocks, bonds, and other speulative “investments” was better than Mining, Manufacturing and Agriculture as producers of wealth. Take a look at the wold folks — the nations that took on those tasks that we have abandoned are doing well while our “Financialized” economy is faltering.
Read Rebecca’s reply to me and the StLouis Fed findings on hours worked for both Service and Manufacturing. My company is at capacity, 24/7 which is why we are adding another SMT line and another plant. I suspect there are other companies in the same situation as reflected by the hours worked.
Demand will not increase until more Labor is employed. More Labor will not be employed until it is more profitable for companies to be employed in Labor intensive businesses. Labor intensive business is not as profitable as speculative wall street ventures with MBO/CDO, CDS, naked CDS, credit cards, etc. The reality is that until the paradigm is changed to the scenario of Labor intensive business, Labor is a dinosaur in the US and we are slowly becoming extinct. Start with the 1978 SCOTUS decision. I kind of said the same thing in the beginning.
Hi Rebecca, sorry for the deviation. This guy does the same thing I do. George, I think we are talking past each other and we are on the same street. I don’t find anything wrong with what you are saying and I am adding to your scenario
This is an interesting article, indeed. The same phenomenon, rising corporate savings, has long been seen in Japan, where the current government is reported to consider levying a tax on corporate savings on behalf of reducing corporate tax rates.
I’m inclined to be on the side of a demand-first group which posits that corporations, be they manufacturers or not, unwillingly hoard money due to weak demand. Therefore, the positive relationship between the unemployment rate and corporate savings, I think, indicates that the less demand is created, the more people are unemployed and the more corporations have to save.
Nobody seems like seriously responding to Mr. Random’s comment, but if you write a graph, an inverse relationship is really observed between the unemployment rate and the federal budget deficit in the US, which one might see as an evidence that the increase in government spending causes the unemployment rate to rise! It might delight anti-Keynesians, but the reason is that the government has to spend more when weak demand causes unemployment.
A careful observation would be needed to find to discover a causal relation.
Oh, I’m sorry. My comment above is messy. You can change it.