More business investment and a narrower current-account gap are necessary for “a credible reduction” in the U.S. budget deficit, according to Andrew Smithers, chairman of the Smithers & Co. advisory firm.
The CHART OF THE DAY displays corporate spending on buildings and equipment as a percentage of gross domestic product in the top panel and the current-account balance, the broadest gauge of international trade, in the bottom panel. The data is compiled by the Commerce Department.
Investment generated 10.4 percent of first-quarter GDP, below an average of 10.8 percent for the past six decades. Last quarter’s gap in the current account widened to $137.3 billion, exceeding a median estimate of $131.9 billion among economists in a Bloomberg survey.
Cutting the government’s trillion-dollar deficit hinges on business and trade because households are in “very poor” shape financially, Smithers wrote yesterday in a report. The savings rate in April was 3.4 percent, trailing the 7 percent average since 1959, Commerce Department figures show.
“An improvement in the trade account is likely to bring with it a rise in business investment,” wrote Smithers, based in London, who provides institutional investors with advice on asset allocation.
The federal deficit for the fiscal year ending Sept. 30 will be $1.17 trillion, according to a March projection by the Congressional Budget Office. While the gap would be 10 percent narrower than last fiscal year’s $1.3 billion, it would be the fourth straight annual shortfall of more than $1 trillion.
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