Savings Needed to Fuel Investments
The downturn in the U.S. economy is flattening out. Whether a turnaround is sustainable or leads to a satisfactory expansion, however, is yet another matter.
The expansion of the 1980s had one nonfinancial characteristic that augurs well for the future: The considerable improvement in productivity within the U.S. manufacturing sector laid the groundwork for strong exports for many years to come, provided that wage increases continue to be moderate and the dollar does not rise excessively on exchange markets.
But from a financial perspective, the 1980s were also characterized by a sharp drop in our national savings rate.
The deficiency in domestic savings meant that the nation's investment in plant, equipment, and housing had to be increasingly financed from abroad.
Looking for Investment Money
This led to high real interest rates to attract funds - with the unfortunate effect that a growing real debt burden helped stymie business and generally weakened the economy.
The imbalance between domestic saving propensities and investment needs continues to be a threat.
There remain huge suppressed investment needs in the U.S. economy - most obviously in the infrastructure of the cities and states but also in industry.
As the economy turns toward expansion, these needs will become more pressing. But if the nation's saving does not rise, these investment needs cannot be met - and the nation's growth potential will be curtailed.
Foreign Funds Drying Up
It is unlikely that savings from abroad will meet our needs in the years ahead to the same degree as in the 1980s.
That's in large part because U.S. industry is now competitive enough that the recent improvement in the international current account deficit - relative to GNP - is likely to be generally maintained, though the deficit may temporarily worsen in the course of recovery.
In addition, much of the rest of the world's savings will be increasingly absorbed at home or nearer home. One example is the redeployment of German savings to help resolve the economic problems of reunification.
Help from Budget Accord
The budget agreement reached by Congress and the administration late last year should be of considerable help in eventually increasing the pool of domestic savings.
But the help will not come in any very significant way for a year or two or more, assuming Congress adheres to the agreement.
This delay puts a premium on raising private savings rates in the interim. But the savings rate of individuals has shown little sign of improving. It usually rises in the course of a recession, but most recently it has dropped back toward the extremely low rates that prevailed in 1987.
We appear to be relying on a pickup in domestic spending on consumer goods to spark the recovery. Thus, over the short run, the personal savings rate may remain relatively low, though the private savings rate could be fortified by a pickup in corporate profits.
Economic Health at Issue
However, the recovery and the sustainability of an expansion will be at risk if the personal savings rate does not start to rise soon, to provide room for the increased investment that will be necessary for our long-term economic health.
Indeed, the time of risk may be fairly close should the markets remain tight in anticipation of strong capital demands relative to available saving. This problem would intensify should lending by banks and other financial institutions also remain more conservative than usual.
The Federal Reserve could attempt to ease any such situation by letting money growth accelerate from its current rather modest pace, in the process also encouraging bank credit expansion. With labor and product markets relatively weak and cautious, the inflationary risk might not be unduly large.
The trouble is that such a policy would also represent a bet that the private saving rate will soon begin rising. To avoid inflation, any extra money created to support the early stages of recovery should be reabsorbed later, once a certain economic momentum takes hold. But unless consumers demonstrate a greater willingness to save, the process of reabsorbing money could also lead to tight enough credit to throw the economy back into recession.
Mr. Axilrod is vice chairman of Nikko Securities Co., New York.
