Is the American economy recovering?

Forwarded from Michael Roberts' blog. (See links list to the right)

February 7, 2011 by Michael Roberts

The January employment figures in the US were totally confusing.  The increase in jobs in January was announced as just 36,000, way below most economists’ forecasts.  That suggested the US economy is stuttering and would not sustain an economic recovery.  On the other hand, the January unemployment rate fell from 9.4% to 9.0%, a huge monthly fall and followed a similar drop in December.  That suggests a fast-gathering economic recovery is under way as corporations and small businesses start to hire new staff.

Since the figures were announced, economists have written reams about what is the truth behind these conflicting data.  The conflict is caused by the employment figures being generated from a different survey than the unemployment figures – the two series are not compatible and only begin to coincide after a long period (of even longer than a year sometimes).  So one or two month’s data tell you little.

So is American capitalism recovering from the Great Recession?  The best way to answer that question is to look at three economic series.  The first is the state of corporate profits and profitability.  This is the best measure of the health of capitalism and the best indicator of which way a capitalist economy is likely to go.

The second measure is to look at investment. Capitalists use most of their profits to invest and without capitalist investment in new structures and new equipments, economic growth will be weak at best and fall back at most.  And with investment in new technology and buildings, increased hiring and a rise in employment should follow.

With a  rise in employment would come better incomes for the majority of working people and thus more spending on consumer goods and services.  So the third and lagging measure is the state of employment.

Let’s consider these series, starting with profits and profitability.  We don’t yet have the figures for US corporate profits for the last quarter of 2010.  The data stop in Q3’2010 at the moment.  But they show two things in the graph below.

First, total corporate profits in $bn are now virtually back to the level they peaked at in Q3’2006.  They fell a staggering 40% from that peak to a low at the end of 2008.  Now they have jumped back by 65% in the last two years, as corporations drastically reduced costs by sacking over 9m workers and stopping investment programmes or closing down plant.   So profits have risen $645bn from the low point.  At the same time, corporate revenues have risen just $$540bn, or 7%.  So the huge recovery in profits has mostly been achieved by cost-cutting not by an increase in sales.

This cost-cutting has also restored corporate profitability.  We can’t measure properly the rate of profit in the US economy right up to the end of 2010 from a Marxist point of view because the data are not available yet.  But we can get a good proxy for profitability by measuring corporate profits against gross domestic product.  If we do that, we see that the rate of profit (more strictly, the profit margin) has climbed back to over 11% of GDP from a low of 7% at the end of 2008.

Profitability is still not back at the peak of 12.3% in Q3’2006, which was artificially bloated by the great credit and financial sector boom that went bust in 2007-8.   But it’s now well above the average rate of the last ten years.

So the profitability figures suggest that the US economy is recovering.  But for the recovery to be sustainable, investment and employment growth must follow.   If we look at the state of private investment in the US, the picture is not so positive.

As the graph shows, private non-residential investment (so this excludes households buying houses and government investment) fell 18% from a peak in mid-2008 to a low at the end of 2009.   Since then, it made a 9% recovery in 2010.  But corporate investment levels are still $240bn lower than they were in 2008, some three years later.   And the ratio of corporate investment as a share of GDP is still 2% points below its peak three years ago.    The recovery in US corporate profitability would suggest that investment will also pick up, but so far it has been painfully slow.

That brings us to employment, where we started in this post.  Recovering profitability and profits have engendered a weak revival in corporate investment.  And because investment is rising only slowly, companies are not rehiring , even if they have stopped sacking workers.  The best measure of that, which cuts through the confusions of the January data, is the employment to population ratio.

When we look at the US data, we find that the employment to population ratio took a huge fall during the Great Recession.  The ratio has more or less stabilised since the end of 2009, but shows little sign of recovering.  The ratio is still higher than in the 1970s, but that’s simply because many women have taken up jobs in the last 40 years ( the male participation rate has systematically fallen over the last 50 years and is now at its lowest level ever).   The overall participation rate (ie the number of those employed compared to those of working age) fell 8% from the end of 2006 and has not recovered.  That means many Americans cannot get a job, have given up and stayed at home or gone into education.

As the US Center for Budget and Policy Priorities puts it, although job losses have bottomed out, 7.7m less Americans are at work than in December 2007.  It’s particularly worse for those long-term unemployed .  Over two-fifths of the 14m Americans who are unemployed have been out of work for over half a year – that’s 6.2m peple and over 4% of the labour force.  That’s more than 70% worse than in the last big recession of 1980-2.

New jobs are being created at about 100k a month right now.  That’s not enough to keep up with population growth and nowhere near enough to get the unemployment rate down.  There needs to be an increase in jobs of 320k a month for two years to get employment back to December 2007 levels and even more to restore full employment.  Indeed, the US Congressional Budget Office reckons even if the US grows at its historic trend real growth rate of 3.4% a year from now on, it will take until 2016 for the unemployment rate to halve!

Having looked at these three series, we can reach a conclusion.  The capitalist economy is recovering from the Great Recession: profits and profitability have nearly recovered to previous peaks.  But American corporations are still reluctant or cautious about raising investment and starting to expand again after huge cutbacks in costs and ‘downsizing’ their workforces.  As a result, employment is not yet picking up much and so American households will not see any improvement from the cuts in real incomes that they have suffered over the last two years.

Of course, that loss in the real incomes of average Americans has not happened to the rich.  The richest 1% own more than half of all the shares of stock traded on Wall Street and the top 10% own the next 40%.  And the US stock market has nearly doubled since its low in March 2009.  Most Americans have hardly any assets and what they do have is just a portion of equity in their homes.  The collapse in home prices (30% plus since the peak) has not been restored at all.  So for the average household, wealth is still hugely down.

In the latest quarterly survey of housing-market conditions, home prices continue to drop. They’ve dropped in all of the 28 major metropolitan areas compared to a year earlier.  The size of the year-to-year price declines is larger than the previous quarters in all but three of the markets surveyed.
And as we have commented on before, Thomas Piketty and Emmanuel Saez have published data recently that show, while the top 1% of American households by income saw a 20% fall in real income during the Great Recession (see my post, No remorse, 13 January 2011).  This wiped out half the gains they had made between 2002 and 2007.  But the bottom 90% of American households also saw incomes fall by 7%, the largest one-year drop since 1938!  And that more than wiped out any increase from 2002 to 2007, leaving real incomes for 90% of American households no higher than they were 15 years ago!

For most Americans, there is no recovery at all.