The Financial Times was quick to note that “little of investors’ exuberance is reflected in core economic data… The US and the UK ended the year stagnant; the eurozone and Japan in renewed recession; the emerging world slowing down”. (Stock Markets Defy Economic Woes, 6 March)
“Asia’s economic recovery is losing momentum and Europe’s slump is proving deeper than expected, raising concerns that soaring stock markets globally have jumped ahead of economic reality”. (Evans-Pritchard, Booming Stock Markets Belie World Economy, Daily Telegraph, 12 March) There is a glaring contradiction between soaring shares and the real economy, a symptom of the peculiar conjuncture of world capitalism.
The Dow Jones Industrial Average (DJIA), an index of 30 ‘blue-chip’ corporations, reached a record high on 4 March, following a 54% fall during the 2007-09 slump. When adjusted for inflation, however, the DJIA is still 10% below its 2007 peak. Nevertheless, this is still an amazing recovery given the stagnation of the world economy.
Writing in the Financial Times, Chris Giles refers to “persistent weak growth” of the advanced capitalist economies. “While International Monetary Fund data show advanced economies grew only 1.3% in the five years between 2007 and 2012, the degree to which economies are pulling themselves out of their woes is much harder to discern amid often conflicting data”. (Little Recovery in Advanced Economies, 5 March)
Giles refers to a new statistical technique of combining various types of data to provide a composite index of economic progress. “The research… suggests that US economic news has been no better than normal and the country’s recovery has been characterised by mini-cycles of moderately good, then bad, data since 2010”. He quotes a professor Beber of Cass Business School as saying “since the crisis, the US has been chugging along around zero. Each time the recovery looks like it’s picking up, it then falls back”.
Referring to the eurozone, Giles comments that “around 2010, indicators of growth were strong in the single currency area [following big stimulus packages by the major EU economies]… but the positive data fell away in 2011 and is now significantly worse than historic norms”.
“The UK is still marred in the weak economic data it has become used to since 2011, with the index remaining reasonably stable at subpar levels”. This describes a depression, not as deep as the 1930s but a period of weak cyclical growth in which capitalism fails to overcome the obstacles to growth and rise decisively above its previous peaks.
But why, in this dismal situation, have share prices shot up? The immediate trigger seems to have been the US employment figures for February, which showed an increase of 236,000 jobs, higher than the expected 165,000. A big factor in this was the increase in construction jobs, due to more favourable weather. The unemployment rate fell to 7.7%. This was taken by financial markets as indicating a continuation, if not a pick-up, in the painfully slow recovery of the US economy. However, while the unemployment rate fell (based on the number of workers seeking jobs), the labour force participation rate actually fell. The employment-to-population ratio (EPOP) has fallen from 63% in 2007 to 58.6% currently. There are still fewer workers in employment than there were before the great recession.
Also driving the surge in share prices is the continuation of low interest rate policies and massive liquidity creation by major central banks. The US Federal Reserve has pumped around $3 trillion into the economy since 2007, and has made it clear that it will carry on creating credit until there is sustained growth. The Bank of England has pumped in £375 billion of quantitative easing. China has expanded total domestic credit from $9 trillion to $23 trillion over the last four years, while Japan is about to embark on another programme of state stimulus and credit expansion.
The expanded credit is meant to feed into the economy to stimulate investment, increase production and consumption. In reality, the continued flood of credit has had a perverse effect. The credit squeeze for small businesses, home-buyers and consumers has continued as banks rebuild their capital reserves. Meanwhile, most of the additional liquidity has flowed into financial markets. The sharp rise in share prices, in fact, is an indication that the ultra-cheap credit is creating a new share-price bubble. This could pop at any time. Even before March is out, the Cyprus crisis is causing renewed jitters on world stock exchanges.
The yields from government bonds are currently extremely low, in fact negative in inflation-adjusted terms. This is also one of the effects of increased central bank liquidity, which allows governments to borrow at near-zero rates. Investors flush with cash, therefore, have turned to company shares in search of higher returns. Wealthy investors are also encouraged by the prospect of increased returns from profitable companies (from dividend payments or capital gains on selling shares at higher prices). The higher corporate profits come from the intensified exploitation of workers. “With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers. ‘So far in this recovery, corporations have captured an unusually high share of the income gains’, said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch”. (Nelson Schwarz, Recovery in US Lifting Profits, New York Times, 3 March)
“As a percentage of national income, corporate profits stood at 14.2% in the third quarter of 2012, the largest share at any time since 1950, while the portion of income that went to employees was 61.7%, near its lowest point since 1966. In recent years the shift has accelerated during the slow recovery that followed the financial crisis and ensuing recession of 2008/09”. (Schwarz) The big corporations continue to apply new technology to reduce their need for labour, as well as relying on cheaper labour in low-cost countries.
The big corporations are also following a policy of pushing up their share prices by buying back their own shares. This amounts to a cash hand-out to their shareholders, which artificially raises share prices by increasing the profit-per-share. This is carried out partly by using their huge cash reserves and partly through borrowing cheap money in order to subsidise the buy-backs. Historically, stock markets were a source of funds for investment in companies. Such is the irrationality of present-day capitalism, that the opposite is the case: there is a massive transfer of funds from profitable companies to shareholders.
The Financial Times Lex column explains: “Companies have been enjoying record profitability. But they are using it on dividends and share buy-backs, which last year reached a combined level surpassed only in 2007. S&P 500 companies paid out slightly less than 90% of net income on dividends and buy-backs last year, S&P’s data show. They are spending to keep per-share earnings and dividends rising. Investors are happy. But it is not easy to see how companies can accelerate the pace at which they return cash. Unlike consumers, they are as leveraged [indebted] as ever”. (13 March)
Steve Rothwell (Associated Press) writes: “Companies have also been hoarding cash. The amount of cash and cash-equivalents being held by companies listed in the S&P 500 climbed to an all-time high $1 trillion at the end of September, 65% more than five years ago, according to S&P Dow Jones indices”. (AP, Housing and Jobs Key to Lifting S&P to Record, 28 December 2012)
Moreover, a large chunk of US corporations’ record profits are hidden away in offshore tax havens (like Bermuda and the Cayman Islands). The Wall Street Journal found that the 60 largest companies moved $166 billion offshore in 2012, shielding 40% of their earnings [profits] from American taxes and costing the US billions in lost revenue.
Just 19 of the 60 companies disclosed their potential tax liability which totalled $98 billion – more than the $85 billion in the automatic, across-the-board spending cuts triggered recently following the US Congress’s failure to agree a budget.
Capitalists invest and produce goods and services to make profits. But it is clear from the current situation that short-term profits are in themselves not sufficient to bring about increased investment. How has this come about? In the closing phase of the post-war upswing after 1968 capitalists of the advanced countries were hit by a decline in profitability. After a period of ‘stagflation’ (low growth, high unemployment, but high inflation), they turned after 1980 to the unprecedented expansion of credit and financial speculation. The neo-liberal policies accompanying this turn helped create the conditions for super-profits and the extreme polarisation of wealth throughout the capitalist world.
Now, most of the big corporations are reaping huge profits. But because of overcapacity in many industries and weak consumer demand (because of reduced incomes and public spending cuts), corporations and their financial masters see insufficient openings for profitable investments. Paul Krugman sums it up: “Not only are workers failing to share in the fruits of their own rising productivity, hundreds of billions of dollars are piling up in the treasuries of corporations that, facing weak consumer demand, see no reason to put those dollars to work”. (The Market Speaks, New York Times, 7 March) Krugman calls for a massive increase in public spending to stimulate demand. While this would give a temporary boost to the economy, it would not necessarily create the conditions for profitable investment by the capitalists, the precondition for sustained growth within capitalism.
Meanwhile, as one commentator puts it, corporate profits continue to “eat” the economy. (Derek Thompson, Corporate Profits are Eating the Economy’, New Atlantic, 4 March) The chart (based on US data) shows that, from 1970 to the mid-1990s, the growth of corporate profits approximately followed the growth of GDP and workers’ income. Then “corporate profits began to take off, relative to GDP growth, in the 1990s, before exploding in the last decade”. Profits plunged during the 2008 crisis, but have since recovered to new heights (the finance sector now accounts for roughly half of US corporate profits).
“When the economy crashes [says Thompson], we all crash together: corporate profits, employment, and growth. But when the economy recovers, we don’t recover together…”