The author is editor of The Overshoot research service and co-author of Trade Wars are Class Wars
There is a conundrum buried deep in US economic data that matters to investors. According to balance of payments figures, which cover trade and other cross-border transactions, American consumers, businesses and the government collectively spent about $800 billion more than they earned in 2021.
However, national data on savings and investment by sector imply that the gap between income and expenditure was only about $300 billion. This leaves a “statistical gap” of about $500 billion, or about 2.5% of GDP. This is the largest difference on record between the two measures of the US current account deficit.
There are only three explanations. The first is that the balance of payments data overestimates the current account deficit. Alternatively, national income may be overstated or domestic expenditure may be understated. While all three are possible, the most likely explanation is that business capital expenditures are underestimated, perhaps by as much as 15%.
The Bureau of Economic Analysis generally attributes the entire “statistical discrepancy” to difficulties in estimating US corporate profits after taxes and dividends, or “net savings,” and investment spending. Data on government budgets, household income and expenditure, exports and imports, and foreign investment earnings are all considered less error-prone.
According to the latest official figures, the companies generated about $1 billion in after-tax and dividend profits from their US operations in 2021 – and spent just $420 billion in capex, net of depreciation.
In 2019, “net saving” and “net investment” were just under $700 billion. The figures therefore imply that “net saving” increased by almost 50% compared to 2019, while “net investment” fell by almost 40%.
As a result, the “net lending”, or savings minus investment, of US businesses, which equals their combined contribution to the US current account balance, has apparently risen from around zero before the pandemic to nearly $600 billion. dollars in 2021.
But that would be totally inconsistent with the balance of payments data, assuming the figures on household saving and government borrowing are broadly accurate – and they probably are.
The question is whether the implicit measurement error is attributable to the profit side of the equation, the investment side, or both.
While the BEA’s internal view is that the “statistical discrepancy” generally reflects difficulties in counting profits, the government’s current estimates are broadly in line with what public companies have told investors. It is possible, but unlikely, that these earnings reports are inaccurate.
It is even less likely that the US corporate “net lending” and current account deficit were both overstated because the BEA somehow missed a 50% increase in profit shifting to foreign jurisdictions. The most plausible explanation is therefore that capital expenditure before depreciation is underestimated.
It wouldn’t be the first time the government has overlooked business investment due to methodological limitations. In 1986, the BEA increased its estimate of the average annual growth rate of business spending on durable equipment by 5 percentage points after revising the way it measured changes in the price of computers. The BEA did not count computer software purchases as business investment until 1999.
Similarly, it was only in 2013 that the BEA decided to recognize R&D expenses as investments. In 2018, the BEA concluded that business investment and profits had been underestimated because of the way they had measured depreciation.
More recently, economists David Byrne, Carol Corrado, and Daniel Sichel have argued persuasively that spending on cloud computing capacity is misclassified as consumption of intermediate inputs by firms, rather than investment in new assets. fixed.
The lack of investment in data would help explain the U.S. economy’s relatively robust import demand relative to domestic demand. More importantly, it would help explain why profits continued to grow.
As business forecaster Jérôme Levy recognized more than a century ago, capital expenditure is the only sustainable source of profits for the entire economy, as buyers obtain depreciating assets. slowly, while sellers get income immediately.