Tuesday, April 3, 2012

Why is the US recovery so weak? – look at profitability

by Michael Roberts

The latest official data on US profits and GDP have been released.  Now we know the full story up to the end of 2011 (see the US Bureau of Economic Analysis http://www.bea.gov/newsreleases/national/gdp/2012/gdp4q11_3rd.htm).

The first thing to note is that the Great Recession, as with most capitalist slumps, started with a collapse in investment.  Expressed as a percentage of GDP, US business investment (which I define as non-residential fixed investment and durable goods purchases) started to fall as early as 2006 before troughing in mid-2009. But as you can see, the recovery in investment since then has been very weak: it remains 22% below its peak.  The grey patches show the recession periods in the US.

Measured in dollars, fixed investment peaked in absolute terms in early 2007, fell to a trough in mid-2008  and has made only a modest recovery since.  At the end of 2011, US business investment in nominal terms was still some 8% below its previous peak before the start of the Great Recession.
The reason for the slow recovery can be found in the hoarding of cash by US corporations.  Corporate profits peaked back in mid-2006, falling 42% to a low at end-2008.  So profits fell first and investment followed three quarters of a year later, leading to the recession.  This is one of the key analytical differences between a Marxist analysis of the ‘business cycle’ and the Keynesian one.  The Marxist analysis starts with profits and profitability and moves onto the impact on business investment and then job losses (a rise in the ‘reserve army of labour’) and finally to consumption.  Keynesian analysis starts with a fall in ‘effective demand’ (investment and consumption) which hits sales and then business profits.  This is back to front (see my post, Double dips, deficits and debt, 24 August 2011).

US corporate profits have recovered dramatically since the trough at the end of 2008.  They surpassed their previous peak in 2006 by early 2010.  This was achieved by a massive reduction in costs (including labour costs) and a strike in investment.  But most of the recovery in profits since the end of 2008 has been hoarded and not spent on new investment.  According to these latest figures, undistributed profits have accumulated to $744bn from just $19bn at the end of 2008!   Profits are up around $1trn since then, but the cash accumulation is up over $700bn, so only 30% of the increase in profits has been spent on new investment.  This explains why the economic recovery has been so weak, with the US economy growing only barely at 2% a year (1.6% yoy according to the latest Q4’11 GDP data).

By the way, it is exactly the same story in the UK, where the corporate cash hoard has reached £754bn, even larger as a share of UK GDP.   According to Treasury Strategies, a body that looks at these things, corporate cash in the US was 10% of GDP in 2000 and is now 15%, while in the Eurozone the corporate cash pile has risen from 15% to 21% and in the UK from 26% in 2000 to 50% of GDP in 2012 (http://treasurystrategies.com/news)!
Why have US corporations hoarded their profits rather than invest in new expansion?  It is not just uncertainty about the future, with debt crises in Europe, slower growth in China or the fear of a new banking collapse.  These are ‘psychological’ explanations beloved by mainstream economics and Keynesian ‘expectations’ theories.

There is a good objective reason for that.  This is the crucial point.  While US profits are up, profitability i.e. the rate of profit, is not.    I have measured the rate of profit in ‘whole economy’ terms i.e. total surplus-value in the economy (net product less employee compensation) against the net fixed assets of the corporate sector and labour costs.  And I have measured fixed assets in both replacement and historic costs terms.  I have also measured the profitability of the corporate sector on its own.  The results are the same: despite the credit-fuelled boom of 2002-07, the US rate of profit is still below its peak in 1997 just before the Great Recession.  The Great Recession saw the rate of profit plunge, but the subsequent recovery in profitability did not achieve a return to the previous rate of profit.

This suggests that the impact of the destruction of capital values (capital stock and the labour bill) in the Great Recession, though huge, has still not been enough to restore US profitability.  Given that the previous boom of 2002-07 was one characterised by a massive expansion of credit (or fictitious capital), if we also measure profits relative not just to tangible assets (the cost of machinery, plant, offices and labour) but also to debt, then profitability is even worse.

The Great Recession was ‘great’ precisely because of the huge rise in private sector debt that now has to unwind.  The burden of that debt (subsequently transferred to the public sector and the taxpayer) is weighing down on the ability of capitalism to recover ‘normally’.

We don’t yet have all the data to make an accurate measure of the US rate of profit in 2011, using Marxist categories.  In particular, we don’t have figures for fixed assets in 2011 yet.  But I have made a reasonable estimate of where that might have ended up by looking at previous recoveries from recessions.  On that basis, I reckon the rate of profit fell back in 2011.

This current ‘profit cycle’ started at a peak in 1997 (see numerous posts!).  It fell back to a low in 2002 after the mild recession then.  It then rose up to 2006  before heading down again before the start of the Great Recession – again, profitability led investment and that led to the recession.  Through the Great Recession of 2008-9, profitability fell 13% from its 2006 peak.  Then it made a sharp recovery in 2010 of 10%.  But I reckon it slid back last year.  That does not encourage corporations to launch a big investment programme.  Indeed, if I include financial assets as well as tangible assets in the denominator for 2011, there has been little or no recovery.  Deleveraging (or the destruction of capital value) has not been sufficient.

What will happen from here?  Well, using reasonable assumptions for GDP growth, employee wage bills and net fixed assets, I reckon the US rate of profits will slide further in the next few years, eventually provoking a new economic slump from about 2014 onwards with an actual fall in total surplus value.   We remain in the down phase of a 16-18 year profit cycle that will only be reversed when the value of capital (both tangible and fictitious) has been reduced sufficiently to sustain a new period of rising profitability as from 1982-97.  In the meantime, the US economy remains in its ‘long depression’.

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