Maybe you’ve noticed that the economy has been acting strange lately: Corporate profits and stock prices have grown much faster than the economy, while economic growth has significantly outpaced job growth. In the past, these things moved more in synch with each other.
The cause of this disconnect was assumed to be the rising productivity of American workers, which would be a good thing for the economy over the long run. Unlike past productivity gains, however, these haven’t generated increased incomes for most workers. Nor has this improved competitiveness translated into much improvement in the merchandise trade deficit.
Steven Pearlstein is a Pulitzer Prize-winning business and economics columnist at The Washington Post.
And then there is the ongoing disconnect between short-term interest rates, longer-term rates and the pace of economic growth, which has frustrated the efforts of the Federal Reserve to bolster the recovery.
The simplest explanation for all of these seeming abnormalities may be globalization, which has fundamentally altered the structure and dynamic of economic activity. And because of the dramatic increase in the flow of goods and capital across borders, the vocabulary we use to talk about the economy, the statistics we have to measure it and some of the tools we have used to manage it have become obsolete.
A frequent mistake — one of which I am as guilty as anyone — is using the performance of the broad U.S. stock market indexes, and the companies that comprise them, as a proxy for the performance of the U.S. economy. Until the late 1990s, that might have been a reasonable presumption. Since then, however, most of the large companies reflected in those indexes have transformed themselves into global enterprises with global supply chains, global sales, global workforces and global sources of capital. That their shares are listed on a U.S. stock exchange is something of an historical artifact.
Standard & Poor analyst Howard Silverblatt calculates that, for the 250 companies in the S&P 500 that break out sales by geographic region, roughly half of sales and profits now come from overseas. This probably overstates the situation for the S&P 500 as a whole, because the companies that don’t break out foreign sales tend to be smaller or operate domestically. But even if you figure that the average for the entire group is closer to a third, this is no longer your grandfather’s S&P 500.
Since 1989, the Commerce Department has surveyed large U.S.-based multinationals — the most global of U.S. companies — to determine the scope of their foreign activities. The results are pretty striking. Among nonbank multinationals, the portion of sales attributed to foreign-owned affiliates has jumped from 33 percent in 1989 to 62 percent in 2009. During the same period, the foreign share of total employment has jumped from 21 percent to 33 percent, while the foreign share of capital expenditures has risen from 22 percent to 27 percent.
This data confirm the anecdotal impression one gets from corporate executives that big U.S. companies are growing much faster abroad than they are at home. And it is largely because of this that their profits are near record levels despite the lackluster recovery at home.