Corporate America is husbanding its profits. It invests mainly in the safest projects. From 2007 (the previous business cycle peak) to 2012, domestic corporate profits climbed 35 percent while investment in plants and equipment rose only 2.6 percent. U.S. companies have accumulated a huge cash hoard of $1.8 trillion as of the end of 2012.
A well-functioning economy is a circular process by which one person’s spending becomes another person’s income, which is then spent again. Today, there’s a damaging disconnect between capital’s rising share and its subsequent spending. So the economy sputters.
Robert J. Samuelson
Samuelson writes a weekly column on economics.
Of course, it’s not literally true that labor can’t spend and capital won’t. In 2012, U.S. gross domestic product was $16.2 trillion; of that, $11.1 trillion was consumption spending on everything from cars to fast food. But adjusted for inflation, the increase from 2011 in consumer spending was only 2.2 percent, not enough to accelerate the recovery. The economy seems stuck in a self-defeating cycle: Weak consumer spending rationalizes weak investment spending; this keeps economic growth low and unemployment high, while putting downward pressure on labor’s income share.
We need to break this cycle. It’s possible. The gradual reduction in unemployment and improvement in housing might tip the economy into faster growth. But August’s mediocre employment report (only 169,000 jobs added) emphasized the grounds for skepticism. Consumer spending and business investment represent about 80 percent of the economy. The rest is housing investment, government spending and net exports. Each of these also faces problems. In housing, mortgage lending standards have tightened. Government grapples with long-term budget deficits. Exports suffer from sluggish growth abroad.
What would improve the odds is more exuberance from the custodians of capital. CEOs seem content to sit on their profits and invest only when the needs and the returns are indisputable. Careless capital, which fostered the financial crisis, has given way to ultra-cautious capital, which is making a lackluster economy self-fulfilling.
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