By John Richardson
THE extent to which the US economy has become distorted in favour of the corporate sector was thrown into sharp relief by this article in the New York Times (the financial sector is another separate, but equally disturbing story).
Whether the US can tackle the longer-term factors behind the distortions in favour of companies seems to be very much in doubt.
Decent politicians would have to emerge who could devise a sensible economic policy based around innovation and creating new jobs, rather than one based on the ridiculous notion that taxes can never again be raised. We will leave this theme for later posts.
Here we will look at the temporary factors behind the surge company earnings, across all sectors including chemicals, post Q4 2008. We will also talk about why we think these factors are coming to an end.
Firstly, here are some of the statistics from the NYT report, compiled by the Bureau of Economic Analysis of the US Commerce Department:
*In the eight decades before the recent recession, there was never a period when as much as 9 per cent of GDP went to corporates in the form of after-tax profits. Now the figure is over 10 per cent
*During the same period, there never was a financial quarter when wage and salary income amounted to less than 45 per cent of the economy. In the third quarter, the figure was below 43 per cent
*Wage and salary income in Q3 rose by just 1.8 per cent in Q3 compared with the last quarter of 2007 – when the US recession began. Corporate profits before tax were 35 per cent higher
This strong surge in profitability has been seen as sustainable by some chemicals company senior executives, and by chemicals analysts and investors. The blog has for a long time thought the recovery in earnings would not last.
Source of graphs: New York Times
The extraordinary rebound in profitability – from late 2009 up until Q3 this year – was the result of:
1.) Lower financing costs for big companies since Q4 2008, thanks to quantitative easing.
2.) The boost to exports caused by a weaker dollar, which was another deliberate result of quantitative easing.
3.) Strong growth in emerging markets. In China this was stimulus-fuelled, whereas in India it was driven by lower interest rates and greater confidence that politicians were finally tackling long-standing investment hurdles.
4.) Restocking from the chronically low inventory levels of late 2008. Even though careful stock management became a way of life for companies after the crisis, some rebuilding of inventories took place down all the production chains as confidence returned – and as financing became easier.
But now companies face:
1.) A new global banking crisis, with banks across many countries becoming more reluctant to lend, as the Eurozone confronts collapse.
2.) A stronger dollar due to the “flight to safety” from riskier assets.
3.) Fiscal tightening in China. China confronts a non-performing loans crisis that could destabilise its whole economy. India faces high inflation, likely to be made worse by the strengthening dollars. Corruption scandals have also drained investor confidence in politicians, which we discuss in more detail in Chapter 6 of our e-book. Boom, Gloom & The New Normal.
4.) Tighter inventory management because of the fear of what the New Year will bring. “Buyers have become very fearful. They are buying in smaller individual lots, in smaller total volumes, and are waiting very late in each month to make their purchases,” the CEO of a major European chemicals company told the blog last week.