It's the best of times for U.S. corporations
WASHINGTON (MarketWatch) – Looking around in your neighborhood and around the world, you might get the idea that everyone is suffering from our hard times.
Millions of people are out of work. Millions of homes are threatened with foreclosure. Students are in hock up to their necks. Retirees are getting nothing on their bank accounts. State and local governments are cutting back services and employment. The federal government's debt is soaring. Small businesses can't get loans to expand or to stock their shelves.
But not everyone is suffering equally. In fact, some "people" are doing fine. Those people are called "corporations."
President Barack Obama got a lot of grief last month when he said "the private sector is doing fine." As a political statement, it was about as tone deaf as they come. But as a piece of economic analysis, the president was spot on.
The private sector is doing fine, especially larger companies.
Private-sector businesses, large and small, have increased their employment by 3.2 million since the recession officially ended three years ago. Over the past year, private employment has increased 1.8%, about twice as fast as the population is growing.
On the hiring side, the private sector is doing fine, not great.
We may judge the private-sector on its contribution to job growth, but there's only one standard by which businesses measure their success: profits. And by that standard, U.S. corporations are doing better than ever. Corporations are swimming in profits.
Unfortunately, their success means very little to the rest of us. It has boosted the stock market, but it hasn't led to a robust expansion of jobs or investment in America that could create more jobs in the future.
After-tax profits of nonfinancial corporations soared to a record 11.4% of national income in 2011. In the 11 quarters since the recession officially ended, profits have averaged 10.8% of national income. From 1947 to 1999, that ratio was never above 9%. If you are a corporation, this is the best of times.
The return on investment is also at a record high level. After-tax profits of nonfinancial corporations rose to a record 14.7% of the cost of tangible assets, double what it was during the 1980s.
If you're a believer in supply-side economics, you know what's supposed to come next: A boom like never seen before. In theory, increasing the returns from investment should provide incentives to supply even more investments. But we know that didn't happen.
Instead of plowing their profits back into more productive assets like land, buildings, equipment, and intellectual property, corporations mostly gave $1.5 trillion they earned in profits in 2011 back to their shareholders through dividends and stock buybacks, or else hoarded it in a corporate rainy-day fund.
In 2011, corporations authorized about $450 billion in share repurchases, and paid out about the same amount in dividends. At the same time, nonfinancial corporations had $1.7 trillion in liquid assets on their books.
It's not as if corporations haven't been investing at all; they have been, just not at the usual pace. Capital spending on fixed investments rose by about 11% in 2011 to $1 trillion, accounting for about half of the 1.7% growth in gross domestic product last year. The investment was significant, but it was still less than corporations had invested in 2006.
As a proportion of internal funds generated by corporations, investments in the U.S. are at record-low levels. In most years since the 1940s, corporations' capital spending has exceeded their internal cash flow, meaning they were borrowing and raising capital from the outside to fund their investments. That's now been reversed: Corporations are net lenders, not borrowers.
Corporations aren't raising any money in the stock market, either. In 2011, corporations returned about $473 billion to shareholders, mostly through buybacks, mergers and acquisitions. The last year that corporations raised any net money by selling stock to the public was 1993.
To a surprising extent, corporations are now in the business of returning capital to their owners, not in the business of raising money from savers in order to put those savings to best use, as described in Economics 101 textbooks.
Corporations may be intensely profitable, but they have no profitable ideas about what to do with the vast sums they earn. The owners of corporations are getting rich, but they would do well to wonder where next year's profits -- or the next decade's profits -- are going to come from.