A Penny Saved Is an Economy Strengthened
Anxiety about the U.S. economy is running high. The latest statistics--the government’s leading indicators, factory orders, the intentions of corporate purchasing agents--all point to a slowdown in business.
And the mood is anxious in the stock market, which fell sharply last week, although prices bounced back a bit on Monday in slow, pre-Fourth of July trading.
The worry is about recession. Will the economy only slow down or will it tumble into a new recession like that of 1982, with massive layoffs and economic suffering?
The answer almost certainly is slowdown. What the economy is really doing is not declining into recession, but undergoing a profound shift from the 1980s to the 1990s, from a heavy dependence on debt financing to a healthier reliance on savings and investment. The transition may be wrenching, but ultimately the economy could emerge stronger for the decade ahead.
Evidence for such a hopeful outlook is in statistics on debt and personal savings. U.S. companies and consumers are not adding to their debts, notes Charles Clough, chief investment strategist for Merrill Lynch, the securities firm. And that is encouraging, even though one reason debt isn’t growing is that many companies and individuals are already borrowed to the limit.
Americans Saving More
The fact is, banks and other lenders are now collecting more in interest each year than they are laying out in new loans--and that’s a condition that should lead to a fall in interest rates.
Even more hopeful is the news that Americans are saving more--5.7% of their disposable income in the first quarter of 1989, compared to 3.7% through all of last year. That’s the highest level of savings in four years and reflects both a slowdown in spending by consumers worried about the economy and an aging baby boom population thinking about retirement.
It’s a good beginning for a pattern of higher savings, although still below the 7% to 8% of their income that Americans saved in the 1950s and ‘60s when the economy was truly strong.
It’s those savings, many analysts believe, that are generating long-term confidence about the U.S. economy and boosting the dollar’s value on world markets--despite the prospect of falling interest rates, which normally would bring the dollar down.
Change, however, is not painless. When economies shift, some industries suffer. As a general rule, those industries that depend on high levels of borrowing will do comparatively poorly in the new environment. They include commercial real estate, already in the doldrums in many cities, and residential real estate, which has slowed even in Southern California. Retail stores and auto dealers may be hurt as consumers spend less.
But the payoff will be in a healthier economy in the 1990s, says Peter Rona, president of IBJ Schroder Bank & Trust Co., a U.S. joint venture of the Industrial Bank of Japan and London’s J. Henry Schroder banking company.
“If we could just get the savings rate closer to 8%, we would have balanced trade and the need for foreign investment would be reduced,” says Rona.
Lower Dollar Hurt Industry
It is important that domestic savings be able to finance U.S. industry, he explains, because continuing to depend on Japanese investors to buy $50 billion to $65 billion a year in U.S. government bonds and other securities is not healthy.
The money stopped coming once, says Rona, when Japanese buyers fearing a decline in the dollar stayed away from U.S. Treasury auctions last fall, and could do so again. The American economy weathered the capital shortage at the time, but interest rates rose.
Thus, the lower dollar that in one sense was helping U.S. industry sell its goods on world markets was hurting it in another way by raising interest rates. U.S. companies have to borrow at 11%, while Japanese companies borrow at less than 5% and West German firms at 6%.
It’s probably no accident that, since then, thinking appears to have shifted, so that a lower dollar is no longer seen as the key to U.S. competitiveness. Rather, there is greater understanding among financial and economic experts that, if domestic savings increase, then U.S. industry can enjoy lower costs of capital and be competitive with a strong dollar.
“We can come into the 1990s with an economy driven by savings and investment,” says Merrill Lynch’s Clough. He is not alone in that vision. It is shared by economists Deborah Allen at California’s Claremont Economics Institute and Edward Yardeni at Prudential-Bache Securities, who have long anticipated an increase in savings among Americans.
If those experts are right, the long-term outlook is bright indeed. The immediate prospect is for lower interest rates; that’s why bond prices are rising at the moment. Then, the next upturn in the economy and in the stock market will be led by companies making electrical equipment and other machinery for expanding U.S. industry and for export to growing foreign economies. Foreign investment will still be welcome in U.S. markets--perhaps even more welcome because, with adequate domestic savings, it won’t be so critically needed.
That’s a comforting vision to be sure, but there are many who see it through the present anxiety.
