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.
(Note to investors: If a public company with global reach does not provide a geographic breakdown of its sales, profits, production, employment and capital investment, it is probably not a company you should invest in. That’s hardly a way to treat your owners.)
Judged by the nationality of their shareholders, U.S.-based companies are also becoming less American. According to the Treasury, 11.4 percent of the U.S. stock market was owned by foreigners last year, up from 10 percent the year before. For the biggest companies, foreign ownership is likely to be at least double that, and my guess is that the official statistic understates the reality.
In terms of the bond market, the influence of foreign investors is even greater. Last year, 53 percent of all outstanding U.S. Treasury bonds were held by foreigners, according to the Treasury. That was down from a high of 61 percent two years before, when global investors were fleeing to the safety of U.S. government debt.
Foreign participation is good for American taxpayers, who are able to borrow at lower interest rates because foreign investors and central banks want to store their savings in U.S. government debt. But the increased demand for U.S. debt instruments has also made it harder for the Federal Reserve, which sets the rate at which banks can borrow overnight, to influence the longer-term interest rates that are determined on the bond market and matter most to households and businesses.
Six years ago, when the Fed was raising the federal funds rate in an effort to slow the economy, then-Chairman Alan Greenspan talked about facing a “conundrum” when long-term rates remained stubbornly low. Foreign bond-buying was a big part of that story. More recently, the Fed’s efforts to lower long-term interest rates through an aggressive policy of “quantitative easing” has been stymied at times by offsetting sales of Treasuries by foreigners and foreign central banks moving to reduce their dollar holdings.
Ironically, at the same time that financial globalization is reducing the Fed’s influence over the U.S. economy, it has increased the Fed’s influence over economies elsewhere, particularly those countries in Asia, the Middle East and Latin America that peg their own currencies to the value of the U.S. dollar. The IMF calculates that 38 percent of global economic output comes from fully dollarized countries; if you add in countries that keep a loose peg, it’s not hard to get close to half of the global economy. Those countries are now feeling the effects, in the forms of higher inflation and rapidly rising prices for stocks and real estate, of the nearly $2 trillion the Fed has pumped into the financial system. Foreign central banks have tried to offset these impacts through higher interest rates, restrictions on bank lending and controls of foreign capital inflows, with varying degrees of success.
Economists also are discovering how the globalized supply chains of U.S. based-companies have led government statistical agencies to overstate the size and growth of the U.S. economy — and, along with it, the growth in labor productivity, particularly in manufacturing. The implication of this mismeasurement is that the decline in GDP during the recession was greater than originally thought and the growth since has been weaker, which perhaps helps to explain the disappointing jobs picture.
The source of this mismeasurement is rather technical, having to do with the price estimates for imported parts and material. If the prices of these “intermediate goods” were actually lower than assumed, and the volume higher, as economists now suspect, then the economic value that was added to them by American workers would have been overstated by the official GDP statistics.
Michael Mandel, an economist at the Progressive Policy Institute, was one of the first to sound the alarm about this statistical mismeasurement. Mandel explains that the increase in overall output and productivity has been real — it’s just that much less of it can be attributed to U.S. workers. Instead, more of it reflects the productivity gains of foreign suppliers or the increased efficiency of manufacturing supply chains — gains that more naturally flow to foreign workers and the company owners and executives who set up and manage the supply chains. That would help to explain the absence of wage gains in the United States.
“The mismeasurement problem obscures the growing globalization of the U.S. economy,” Mandel writes. More significantly, it suggests that all that off-shoring and outsourcing has generated less benefit to American workers and the American economy than most economists and the business community have claimed.