Can Consumers Thrive If Corporations Don't?
U.S. workers and consumers (who are for the most part the same people) seem to be doing pretty well at the moment. Businesses, not so much. As Bloomberg’s Rich Miller and Victoria Stilwell reported last week:
Consumer spending grew last year by the most since 2005, in spite of a slight slackening in the fourth quarter. Nonresidential business investment, meanwhile, rose at its slowest pace since 2010 as oil and gas companies sharply curtailed spending.
Miller and Stilwell suggested that this was a temporary juxtaposition; eventually consumers would pull businesses up, or businesses would drag consumers down. Most economists, they wrote, predict it will be the former and the U.S. economy won't fall into a recession. Either way, the assumption is that businesses and consumers will eventually get back in sync. That’s how things have worked in the past.
We’ve been hearing a lot over the past decade-plus, though, about the diverging fortunes of U.S.-based corporations and U.S.-based people. The corporations have for the most part been thriving in an age of globalization. The people, not so much. Corporate profits in the U.S. have almost tripled since 2000, adjusted for inflation ; real median household income is down 7 percent since then.
Could it be, then, that the fortunes of corporations and average Americans have become so disconnected that things could now go in the other direction, with corporations struggling in the face of a global slump and consumers laughing all the way to the store for years to come?
Short answer: I don’t think so, at least not for that long. This will be interesting to watch, though.
One major reason why corporations have thrived while people haven’t is that big corporations in particular were able to take advantage of growth overseas even as the U.S. economy stagnated. Estimates of the share of revenue that the companies in the Standard & Poor’s 500 Index get from abroad range from 33 percent to 48 percent. That share has been pretty flat since the recession, but is up from a decade ago. The Bureau of Economic Analysis’s much broader measure of foreign earnings, meanwhile, shows a huge rise since the mid-twentieth century.
Some of the biggest names in U.S. business are particularly dependent on overseas markets. Apple, for example, got 59.8 percent of its revenue and 62.8 percent of its operating income from outside the Americas in its 2015 fiscal year. In the most recent fiscal year for which numbers are available, Exxon Mobil got 67.3 percent of revenue from outside the U.S., Alphabet 57.3 percent, Microsoft 54.1 percent, Facebook and General Electric 52.5 percent.
Overall, corporate earnings have become less dependent on the health of the U.S. economy. The big question is whether this also means that the U.S. economy has become less dependent on them.
In the past, a decline in corporate profits has usually been bad news for the U.S. economy:
What usually happens is that, with profits under pressure, corporations start slashing jobs and cutting back on investment. Consumers eventually respond by cutting back spending as well, and the economy falls into recession. Since 2011, corporate profits’ share of national income has been declining. But with so much of that profit now coming from outside the U.S., it’s at least possible that corporations will slash jobs and cut back on investment somewhere else.
The Bureau of Economic Analysis doesn’t publish inflation-adjusted corporate-profit data, and the consumer price index surely overstates the inflation faced by corporations. But for the purposes of this comparison I figured I’d be OK just plugging the numbers into the Bureau of Labor Statistics’ CPI-based inflation calculator.
Not every company in the S&P 500 reports revenue by geography. The 48 percent estimate only covers the companies that break out revenue by geography; as best I can tell, the 33 percent estimate includes all the companies in the index and assumes that those that don’t break out foreign sales don’t have any.
As noted on the chart, this includes dividends paid to U.S. investors by foreign corporations. It does not, however, include earnings of foreign subsidiaries of U.S. corporations that are kept overseas. And foreign subsidiaries of U.S. corporations keep a whole lotta money (more than $2.1 trillion for Fortune 500 companies, according to one estimate) overseas these days to avoid U.S. taxes.
Apple doesn’t break out U.S. revenue or income.
The BEA will release its fourth-quarter 2015 corporate profit estimates in March. National income, in case you were wondering, is a gross-domestic-product-related measure that, unlike GDP, includes income from abroad.
The U.S. oil and gas industry is already slashing jobs and cutting back investment in the face of an oil-price collapse. But so far most of the rest of corporate America hasn't.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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