Does the US Corporate Saving Rate Portend a Lower Unemployment Rate?
Does the US Corporate Saving Rate Portend a Lower Unemployment Rate? An interesting thing happened in Q4 2011: the corporate saving rate declined following two quarters of gains. Nominal net saving by the domestic business sector fell 3%, while nominal gross fixed investment and inventories surged 6% – the two pushed the saving rate down nearly 40 bps to 2.94% of GDP. The corporate saving rate (gross saving less gross investment) has been on a downward trend since the end of 2009, a welcomed trend by the labor market.
There’s a very strong correlation between the corporate saving rate and the unemployment rate, 80% according to a simple bivariate OLS regression. I’ve argued in the past that there is some causation to this relationship – but that’s not the point of this post. The point here is that the trend in corporate saving has fallen sufficiently to portend some material declines in the unemployment rate in coming quarters….ALL ELSE EQUAL. For example, a simple bivariate regression would forecast a 7.5% unemployment rate if the corporate saving rate falls another 30 bps to 2.6%.
The all else equal is important. The primary driver of this quarter’s decline in the corporate saving rate was the 6% increase in nominal investment spending, the largest quarterly gain since 2010 Q2. Amid relatively weak manufacturing orders and the expiration of the depreciation allowance, I expect that this momentum is unlikely to be matched in coming quarters. Will firms start drawing down nominal saving to finance new hires?
Better put: will the unemployment rate drop to meet the saving rate? Or will the saving rate rise to meet the unemployment rate?
Rebecca Wilder
originally published at The Wilder View..Economonitors
“Will firms start drawing down nominal saving to finance new hires?”
No they’ll use it for stock buy backs and dividends and other non productive activities.
Yeah, while the top is exercising their stock options.
I think this would be even more compelling if rather than using the always-confusing notion of “saving” (confusing because of the undiscussed dividends and stock buybacks that fledermaus and Daniel Becker aptly point to), it was presented in terms of the obverse: corporate spending. With special attention to the investement vs. consumption mix of that spending.
This would require reversing the scale for spending in the graph, to make the relationship/correlation visually discernable, but I think the possible resulting confusion would be outweighed by the general understanding of spending compared to “saving.”
This seems like substantial evidence in favour of low long term interest rates.