When will corporations spend some of their hoard?
U.S. corporate profits have increased 21.3% in the past year and now
account for the largest share of national income in 40 years, the Commerce Department
Strong productivity gains and subdued wage growth boosted before-tax profits to
11.6% of national income in the fourth quarter of 2005, the biggest share since
the summer of 1966. See full story.
For all of 2005, before-tax profits totaled $1.35 trillion, up from $1.16 trillion
in 2004 and just $767 billion in 2001.
Meanwhile, the share of national income going to wage and salary workers
has fallen to 56.9%. Except for a brief period in 1997, that's the lowest share
for labor income since 1966.
"It's a big puzzle," said Josh Bivens, an economist for the Economic
Policy Institute. "If this is a knowledge economy, how come the brains aren't
being compensated? Instead, the owners of physical capital are getting the rewards."
Despite the flood of cash coming in the door, corporations are investing comparatively
little in expanding their operations. Capital spending has been below average,
especially considering the strength of the economy, the level of profits and the
special tax breaks given to boost investment.
In the fourth quarter, business fixed investment increased just 4.5%. In the past
year, investment has risen 6.8%. The growth rate has been falling for the past
Some economists are counting on the corporate sector to pick up their investments
in the coming year, to replace the economic stimulus that will be lost as the
housing market cools.
Profits have been so high because almost all of the benefits from productivity
improvements are flowing to the owners of capital rather than to the workers.
While profits are up 21.3% in the past year, labor compensation is up just 5.5%.
After adjusting for inflation, population growth and taxes, real disposable per
capita incomes are up just 0.5% in the past year.
Competition, tight labor market may force rise in labor income
But as the labor market tightens, labor's share of income will likely rise, economists
"Capital spending will stay strong," said Gus Faucher, director of macroeconomic
research at Moody's Economy.com. He theorizes that, to maintain productivity growth
in a hypercompetitive world, companies will be forced to invest in capital as
labor becomes relatively more expensive.
Corporations certainly have the means to invest, but they've been cautious, said
Ken Goldstein, an economist for the Conference Board. In 2005, corporations retained
$460 billion of their profits, while handing back $514 billion in dividends.
Consumers, as always, hold the key. If labor income rises enough, consumers could
keep up a healthy pace of spending even if they lose ready access to their home
equity as a source of purchasing power, Goldstein said.
But consumers are very wary of rising prices. So far, their incomes have not kept
pace with inflation. Goldstein expects consumer spending to slow this year.
And if consumer spending slows, corporations will become more hesitant about expanding
their productive capacity. Unless there's stronger demand from overseas markets.
Goldstein figures there's less than a 50-50 chance that business investment will
rise significantly in the coming year. The Conference Board expects the U.S. economy
to grow 2.5% in the next four quarters, after growing 3.5% in the past four quarters.
That's not horrible, but it's not a boom either
The happy scenario could still play out. But "there are a lot of 'ifs',"