But that did not happen in this case. The large increase in saving was offset by smaller increases in investment, inventory accumulation, and the statistical discrepancy. Nothing changes the grim reality that America’s current-account deficit is headed to more than 3% of nominal GDP, implying increased reliance on foreign investors. The US is manufacturing the dollars that foreigners crave, but that is it for now.
Moreover, there was no wand that the BEA magicians could wave to alter the dominant feature of the economic landscape: spending by the federal government outstrips its revenues by a wide margin before and after the data revision. The budget deficit will surpass $1 trillion this year, and, with growth already above its potential rate and unemployment well below its natural rate, the cyclical argument for such stimulus is weak. The concomitant accumulation of debt will weigh on future economic activity and exacerbate financial vulnerabilities.
But not now. We have learned that the economy is expanding slightly faster and households were more thrifty than previously thought. Count this as another case of history reading better than it was lived.
Carmen Reinhart is professor of the international financial system at Harvard University's Kennedy School of Government.
Vincent Reinhart is chief economist and investment strategist at BNY Mellon Asset Management North America Corporation.