Can con­sumers thrive if cor­po­ra­tions don’t?

The Pak Banker - - OPINION - Justin Fox

US work­ers and con­sumers (who are for the most part the same peo­ple) seem to be do­ing pretty well at the mo­ment. Busi­nesses, not so much. As Bloomberg's Rich Miller and Vic­to­ria Stil­well re­ported last week: Con­sumer spend­ing grew last year by the most since 2005, in spite of a slight slack­en­ing in the fourth quar­ter. Non­res­i­den­tial busi­ness in­vest­ment, mean­while, rose at its slow­est pace since 2010 as oil and gas com­pa­nies sharply cur­tailed spend­ing.

Miller and Stil­well sug­gested that this was a tem­po­rary jux­ta­po­si­tion; even­tu­ally con­sumers would pull busi­nesses up, or busi­nesses would drag con­sumers down. Most econ­o­mists, they wrote, pre­dict it will be the for­mer and the U.S. econ­omy won't fall into a re­ces­sion. Ei­ther way, the as­sump­tion is that busi­nesses and con­sumers will even­tu­ally get back in sync. That's how things have worked in the past. We've been hear­ing a lot over the past decade-plus, though, about the di­verg­ing for­tunes of U.S.based cor­po­ra­tions and U.S.-based peo­ple. The cor­po­ra­tions have for the most part been thriv­ing in an age of glob­al­iza­tion. The peo­ple, not so much. Cor­po­rate prof­its in the U.S.have al­most tripled since 2000, ad­justed for in­fla­tion; real me­dian house­hold in­come is down 7 per­cent since then.

Could it be, then, that the for­tunes of cor­po­ra­tions and av­er­age Amer­i­cans have be­come so dis­con­nected that things could now go in the other di­rec­tion, with cor­po­ra­tions strug­gling in the face of a global slump and con­sumers laugh­ing all the way to the store for years to come? Short an­swer: I don't think so, at least not for that long. This will be in­ter­est­ing to watch, though.

One ma­jor rea­son why cor­po­ra­tions have thrived while peo­ple haven't is that big cor­po­ra­tions in par­tic­u­lar were able to take ad­van­tage of growth over­seas even as the U.S. econ­omy stag­nated. Es­ti­mates of the share of rev- enue that the com­pa­nies in the Stan­dard & Poor's 500 In­dex get from abroad range from 33 per­cent to 48 per­cent. That share has been pretty flat since the re­ces­sion, but is up from a decade ago. The Bureau of Eco­nomic Anal­y­sis's much broader mea­sure of for­eign earn­ings, mean­while, shows a huge rise since the mid-twen­ti­eth cen­tury.

Some of the big­gest names in U.S. busi­ness are par­tic­u­larly de­pen­dent on over­seas mar­kets. Ap­ple, for ex­am­ple, got 59.8 per­cent of its rev­enue and 62.8 per­cent of its op­er­at­ing in­come from out­side the Amer­i­cas in its 2015 fis­cal year. In the most re­cent fis­cal year for which num­bers are avail­able, Exxon Mo­bil got 67.3 per­cent of rev­enue from out­side the U. S., Al­pha­bet 57.3 per­cent, Mi­crosoft 54.1 per­cent, Face­book and Gen­eral Elec­tric 52.5 per­cent.

Over­all, cor­po­rate earn­ings have be­come less de­pen­dent on the health of the U.S. econ­omy. The big ques­tion is whether this also means that the U.S. econ­omy has be­come less de­pen­dent on them. In the past, a de­cline in cor­po­rate prof­its has usu­ally been bad news for the U.S. econ­omy: What usu­ally hap­pens is that, with prof­its un­der pres­sure, cor­po­ra­tions start slash­ing jobs and cut­ting back on in­vest­ment. Con­sumers even­tu­ally re­spond by cut­ting back spend­ing as well, and the econ­omy falls into re­ces­sion. Since 2011, cor­po­rate prof­its' share of na­tional in­come has been de­clin­ing. But with so much of that profit now com­ing from out­side the U.S., it's at least pos­si­ble that cor­po­ra­tions will slash jobs and cut back on in­vest­ment some­where else.

The Bureau of Eco­nomic Anal­y­sis doesn't pub­lish in­fla­tion-ad­justed cor­po­rate-profit data, and the con­sumer price in­dex surely over­states the in­fla­tion faced by cor­po­ra­tions. But for the pur­poses of this com­par­i­son I fig­ured I'd be OK just plug­ging the num­bers into the Bureau of La­bor Sta­tis­tics' CPI-based in­fla­tion cal­cu­la­tor.

Not ev­ery com­pany in the S&P 500 re­ports rev­enue by ge­og­ra­phy. The 48 per­cent es­ti­mate only cov­ers the com­pa­nies that break out rev­enue by ge­og­ra­phy; as best I can tell, the 33 per­cent es­ti­mate in­cludes all the com­pa­nies in the in­dex and as­sumes that those that don't break out for­eign sales don't have any. As noted on the chart, this in­cludes div­i­dends paid to U.S. in­vestors by for­eign cor­po­ra­tions. It does not, how­ever, in­clude earn­ings of for­eign sub­sidiaries of U.S. cor­po­ra­tions that are kept over­seas. And for­eign sub­sidiaries of U.S. cor­po­ra­tions keep a whole lotta money (more than $2.1 tril­lion for For­tune 500 com­pa­nies, ac­cord­ing to one es­ti­mate) over­seas th­ese days to avoid U.S. taxes.

Ap­ple doesn't break out U.S. rev­enue or in­come. The BEA will re­lease its fourthquar­ter 2015 cor­po­rate profit es­ti­mates in March. Na­tional in­come, in case you were won­der­ing, is a gross- do­mes­tic- pro­duc­tre­lated mea­sure that, un­like GDP, in­cludes in­come from abroad. The U.S. oil and gas in­dus­try is al­ready slash­ing jobs and cut­ting back in­vest­ment in the face of an oil-price col­lapse. But so far most of the rest of cor­po­rate Amer­ica hasn't.

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