US business investment still stuck

First Look at Q4 Domestic Income Shows Labor Share at Record Low, Corporate Profits at Record High

New data released today by the Bureau of Economic Analysis showed that GDP grew slightly faster than previously estimated in the fourth quarter of 2013, an annual rate of 2.6 percent rather than the previously reported 2.4 percent. Consumption grew more strongly than previously estimated and investment slightly less strongly. Other components were little changed.

Today’s report also includes the first look at the composition of Gross Domestic Income for Q4 2013. The data show a continuation of recent shifts in income shares. As the following chart shows, the share of corporate profits in GDI rose to 12.65 percent, and the share of employee compensation, including wages, salaries, bonuses, and benefits, fell to 52.2 percent. These figures mark record highs and lows for these GDI components since 1947, the earliest year for which data are reported.

The following chart shows trends in the shares of major GDI components over the course of the Great Recession. In addition to compensation of employees and corporate profits, the chart shows the share of proprietors’ income, which includes the net income of proprietorships, partnerships, cooperatives, and other noncorporate enterprises. Proprietors’ income now accounts for 7.9 percent of GDI, up from its low for the recession, but it remains well below the levels of 10 to 15 percent that it reached in the 1950s. Several other small items make up the remainder of gross domestic income, including rental income of persons, net interest, and the net income of government enterprises, which is typically negative.

We can redraw the data in the previous chart to bring out the relative movements in the shares of GDI components more sharply. The next chart assigns a value of 100 to each component’s share in 2007, the year before the recession began. This chart shows that corporate profits were hit hard in the first months of the recession, but began to recover already by the end of 2008, when GDP was still falling. By the time the economy had officially entered the recovery phase in mid-2009, corporate profits were surging to new highs.

Compensation of employees and proprietors’ income behaved differently. During the downslope of the recession, the shares of those two components held fairly steady, that is, they decreased but only at about the same rate as GDI as a whole. After mid-2009, when the economy began to recover, the two diverged. Proprietors’ income grew faster than GDI as a whole, so that its share increased. Compensation of employees grew less rapidly than GDI, so its share began to fall, and is still falling.

These trends in the shares of GDI components provide another view of the substantial changes in the distribution of income and wealth that are underway in the twenty-first century United States. The data shown in our charts are only indirectly related to the more widely publicized increase in the share of total income accruing to top earners, but they explain part of what is going on. It is true that some high earners receive the major part of their income in the form of salaries and bonuses, and that many middle-class families receive some corporate profit income through mutual funds and retirement savings accounts. Still, corporate profits are more unequally distributed and compensation of employees less unequally distributed than income as a whole. That means the rising share in GDI of the former and the falling share of the latter are two of the factors behind the rising fortunes of the super-rich and the relative economic stagnation of the middle class.


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The final estimate of US GDP in the fourth quarter of 2013 was released last week. It came in with a 2.6% annualised growth rate, slightly higher than previously estimated. That means in 2013, the US economy grew in real terms by 1.9% and in Q4 it was up 2.6% over Q4 2012. The US is still growing at below the average rate of GDP growth over the last 30 years of 3.3% a year.

GDP may be rising slowly, but not corporate profits. The share of corporate profits in gross domestic income rose to 12.65%, while the share of employee compensation (wages, salaries, bonuses, and benefits), fell to 52.2%, the highest and lowest share respectively since records began in 1947. The exploitation of labour has reached record levels.
What is often left out of the discussion of profits versus wages is what is called proprietors’ income. Ed Dolan in his blog has highlighted that, in addition to corporate profits, small businesses also take up 7.9% of national income. (see This share is only half is where it was in the 1950s. The large corporations are sucking up the value created by labour in the US.
And it shows what Thomas Piketty revealed in his book, Capital in the 21st century, that the very rich are getting richer, not because they are smarter, better educated or even taking big wage bonuses. It is because income from capital (dividends, interest and capital gains) has rocketed
(see my post,
So the mass of profits accruing to corporations is now some 20% higher in nominal terms than it was before the Great Recession. The mass of profits is not the same as total surplus value in Marxist terms and it is also not the same as the profitability of capital, which I have shown is no better than it was in 2007. But clearly the corporate sector is now better placed than it was to start investing at a higher rate.
The failure to invest in new productive capital rather than in financial assets and property is the reason that the US economy is experiencing the weakest recovery after a recession since 1947. Overall business investment is still below its 2007 peak and the rate of growth has been slowing not accelerating. It fell 16% in the 2009 recession, rose 2.5% in 2010, accelerated to 7.6% in 2011, then slowed a little to 7.3% in 2012. But last year it slowed significantly to just 2.7%.
The level of investment by the top 500 US companies compared to sales or assets remains well below the levels of the 1990s.
S&P capex

Net business investment – that’s after deducting the depreciation of existing stock – is still nearly one-third below the pre-crisis peak. And net investment in structures is more than half below the previous peak, and down nearly 20% in equipment.  Even net software investment is still 12% down.

US business investment level

I won’t go over the arguments on why the US corporate sector is still on an ‘investment strike’ – you can see my opinion in several previous posts. But what are the chances that in 2014 capital spending will finally pick up speed. At the beginning of 2013, most mainstream economists expected just that but were sadly disappointed. The growth rate of investment in both equipment and structures declined last year, which mainstream economists want to blame on a one-off tax incentive that pulled investment forward in time.
Equipment spending rebounded quickly after the recession ended in 2009, but its year-on-year growth rate has fallen in every year since 2010. It rose just 3.1% in 2013 compared with 12.7% in 2011.
Nevertheless, optimism remains. According to the Philadelphia Fed, nearly half of businesses surveyed plan to increase their capex spend in 2014 compared to 39% in 2013, the highest ratio since 2004. Citibank looked at the investment plans of 725 non-financial corporations and found that they expected to raise investment by 5% this year, a bigger forecast than last year – but hardly a breakneck pace.
American corporations’ capital equipment is getting old and the average age of structures is the highest it has been since 1964; equipment since 1995 and intellectual-property products, like software, since 1983. So maybe businesses will have to invest soon?
Capital stock age

This may well be more wishful thinking, however. Net business investment has peaked lower (as a share of GDP) in each successive recovery since the 1980s.

US net investment

And while profit margins may be up as firms squeeze labour’s share, sales revenues are growing only slowly, increasing the risk that any new capital spending may reduce profitability, not raise it.  What is clear is that the US economy will be stuck in its current low-growth trajectory, at best, unless businesses end their ‘strike’ and start to invest in new equipment, plant and technology.

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