Corporations piling up cash and surpluses while household deficits grow

The New York Times has an article today about how, unlike households, American corporations are piling up cash. 

Unlike most American consumers, whose failure to save has exasperated economists for years, the typical American corporation has increased its savings so sharply that it probably has enough cash on hand to completely pay off its debts.

While I haven’t looked at the cash ratios for individual firms, the same thing appears to be happening in Canada.   As I reported a year ago in CUPE’s Economic Climate for Bargaining document, Canadian corporations had accumulated over $300 billion in surpluses (savings and capital consumption allowances minus fixed capital investments and acquisitions) in the previous five years, while the personal sector and unincorporated businesses had accumulated deficits of over $200 billion since 1999.   

This is an unprecedented development.  Canadian households traditionally generated significant savings or net surpluses that were then loaned to corporations or governments through investments in stocks, bonds and other assets, with governments and corporations borrowing from the personal sector.   This all changed quite drastically around the year 1999.     

Canadian corporations have generated massive profits, but done little to put these profits back into capital investments in the Canadian economy.  Increasing amounts have gone into share buybacks, reductions of their debt, and into greater fixed investments overseas. Slow wage and income growth for households and the rising cost of household fixed investment assets – primarily residential houses – have mean rapidly rising deficits for the household sector, also reflected in lower savings rates. 

This week’s release of Canada’s economic accounts figures show that these trends have continued.   Net borrowing by the personal sector reached almost $65 billion last year.  Corporate surpluses did fall slightly to $64 billion from $67 billion in 2006, mostly because of a growth in their fixed capital investments, but the massive imbalance continues.   

This should be a concern on many fronts, with recent economic growth being driven by presumably unsustainable rates of household spending, and further cuts to corporate income taxes being planned. 

While the Bank of Canada’s rate cut is a positive development, this appears to be intended more to directly rescue the financial sector than to help with households.  Interest rate cuts aren’t being fully passed on to borrowers.  Before today’s 50 bp cut by the Bank of Canada, the spread between the bank rate and the posted mortgage rates charged by banks had widened by about 100 basis points across the spectrum since a year ago.  This may have been even wider when actual discounted lending rates are considered.   I still haven’t heard from my bank, er credit union, whether they plan to match this 50 basis point cut.

One comment

  • On the other hand, my mortgage is directly linked to Bank of Canada rates, so I get the full 50 bp reduction as of April 1. And this on top of the previous 50 bp reductions from December and January. But my mortgage is atypical.

    I did a post way back in August when I was pondering whether to go with the fixed or variable rate, so I am pretty happy that I went variable. At the time given the Bank of Canada was puffing its chest about a possible rate hike in September to cool inflation. How times change.

    At least I know there are some financial benefits to my studies in economics.

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