After all, households are trying to rebalance their accounts. As a matter of fact, according to the “Deleveraging? What deleveraging?” report (which is the latest installment of the “Geneve Documents”, by the Centre for Economic and Policy Research (CEPR)), the deleveraging of American households continues, to the extent that American net debt is about to fall below that in the EU.
In order to rebalance the accounts, there are only two options: either increase income or cut spending. Americans now earn 7% less than 8 years ago, so the option is crystal clear. The imbalance between capital and labour is one of the greatest problems of the largest global economy. According to the IMF’s latest estimates, the US has yet a 3.3% output gap, which means it is producing only at 96.7% of its full capacity –i.e. no more, without generating inflation.
To give an example, Spain has an output gap of 3.1%. According to Bloomberg’s and Dow Jones’ data, companies on the S&P will distribute up to 95% of their profits between their shareholders instead of expanding their production. However, as the US reactivation reaches its sixth year in a row, things might change. In fact, the change has probably already started as domestic demand increases and the Fed’s massive liquidity injection comes to an end.
The Wall Street Journal said that in the second quarter, 10 firms who hold a large treasury stock spent up to $116 billion (€91.5 billion) on those operations, which represents 1.6% less than the same period of 2013 and 27% less than in the 1Q14.
Among the companies that have reduced their share buy-backs, there are leaders such as Apple, IBM and FedEx. They have drastically reduced their capital increases and, in general, everything concerning the issuing of securities. Therefore, it is not clear whether this is a change in the trend or a sign that they intent to keep more money in the banks. If the trend does not change in a clear and unambiguous way, the US will have problems reaching cruising speed.
*Image: 401(K) 2013