Corporate profits as a share of GDP are way up. This is supposed to be good for all of us—higher profits, we are told, means greater investment and job creation.
Unfortunately, this is not what is happening. Investment as a share of GDP is down. Job creation is anemic.
The reality is that corporations no longer appear interested in channeling their earnings into productive activities. As the charts below highlight, they are increasingly content to use their profits to purchase stock, including their own stock.
The charts were republished by Yves Smith in her blog Naked Capitalism from the Financial Times. The first shows the growth of stock purchases by non-financial corporations.
As Smith explains:
Notice that US corporations have been buyers in aggregate since 1985. Now admittedly, that does not mean they stopped investing, since the primary source of investment capital is retained earnings, and companies also typically prefer to borrow rather than issue stock. But as of the 1980s, they were already preferring buying stocks (then mainly of other companies rather than their own, as in acquisitions) to the harder work of expanding their business de novo. Deals are much sexier than building factories or sweating new product launches.
But by the mid 2000, companies had indeed shifted to being net savers rather than net borrowers, which was an unheard of behavior in an expansion. That is tantamount to disinvesting.
The second chart reveals the new corporate orientation even more clearly, with corporate profits increasingly channeled into stock purchases rather than productive investment.
This corporate behavior is highly beneficial for both managers whose salaries are tied to the stock prices of their respective firms and those few at the top of the income scale who own a commanding share of the country’s capital assets. As for the rest of us . . . well, it’s a bad deal.