Behind the US ‘recovery’

It is taken for granted in the bourgeois financial media that the US is experiencing a ‘recovery’ of its economy; debate then moves to the possibility of it pulling the rest of the world out of stagnation and deflation. It is true that the US economy gives the impression of some kind of growth since the depths of the Great Recession: the Dow Jones Industrial Average, a stock market index, has risen from a low of 6547 in March 2009 to around 17500 today – an increase of more than 260%. Since the second quarter (Q2) of 2007, before the crunch hit, real GDP has risen by 8.5%. The official unemployment rate has fallen from 9.9% in Q3 of 2009 to just 5.7% five years later.

So, ‘legally’, this is a recovery, but the headline figures hide some awkward facts and there are a number of points to be made. The first is that it is a pretty miserable recovery. Past recoveries have reduced unemployment far faster and reached previous GDP levels far quicker. The second is that over this period, there has been a huge rise in labour productivity, faster than the rise in GDP. From Q3 of 2007 to the same quarter of 2014, business productivity overall has risen 10.1%; in manufacturing it has risen 12.9%. These gains have not been translated into new jobs. In fact, during the same period, business employment has declined 1%, while manufacturing employment has fallen by a huge 12.4%.

Rising inequality

The benefits of the productivity increase have not gone to employees, whose share of domestic income has fallen from 54.4% in 2009 to 52.1% in 2013, but to capitalists, whose profits have grown as a share of domestic income from 7.2% to 10.0%. This is part of the explanation of the massive inequalities in wealth and income between the richest and poorest US citizens. The top 1% enjoyed an estimated 95% of the income growth from 2009 to 2012, while the other 99% experienced pre-tax income growth of 0.4%. By 2012, the top 1% received 23% of pre-tax income and the top 10% had a 50.4% share, the highest level since 1917. If we turn from income, which is a flow of money, to wealth, which is the value of somebody’s assets less whatever debt they owe, the picture becomes even more extreme: the top 0.1% of US citizens, 160,000 households, owned 22% of total wealth.

Deepening poverty

Why has the unemployment rate declined so much? The reason is that millions of people have simply abandoned the search for work: the employment to population ratio – the share of the population who are in employment, which is usually steady over time – has fallen from 62.8% to 59.0% over this period. Today, if the ratio were still 62.8%, then there would be an additional 16.95 million people in employment. What these people are now doing is unclear. Probably many of them have been forced to find work in the ‘underground economy’ where they do not register in official statistics: from dog-walking, baby-sitting, cash-in-hand construction work, day labouring etc, to prostitution and drug-dealing. The underground economy has been estimated at some $2 trillion (current US GDP is around $17.5 trillion).

While the investment portfolios of the rich and the super-rich bulge ever fatter, poverty remains untouched by the ‘recovery’. In 2013 45.3 million US citizens (14.5% of the population) were in poverty, 14.7 million (19.9%) of them children. 33.3 million adults and 15.8 million children suffered hunger; people went hungry in every county in the Union without exception – this is obscenity in the richest country in the world. Poverty and hunger were even worse among single parent, black and Hispanic households.

Financial engineering

What is behind the huge rise in the stock market if the growth in economic activity has not been very impressive? Because companies have been unable to find profitable investment opportunities, they have turned to financial engineering, playing around with their financial organisation, to increase their apparent worth. As we have pointed out in previous reports, they have been engaging in ‘buybacks’. In a buyback, a company repurchases its own shares and retires them. This reduces the overall equity of the company, along with the number of shares, tending to push up the earnings per share and the share price, reorganising the financial structure without any improvement to its production capabilities. The Standard & Poor’s Buyback Index of public companies that have engaged in buybacks has outstripped the performance of the S&P 500 stock exchange index. There have been some $2 trillion worth of buybacks since March 2009. In the last two years, the sales growth rate has averaged 2.6% per quarter, while earnings per share grew by 6.1% per quarter. Clearly, the performance of stocks is no reflection of the real progress of the US economy. During Q3, of 2014 companies indexed in the S&P, 500 spent $143.3bn on buybacks; a year-on-year increase of 16%. Over the previous 12 months, companies spent $567.2bn on buybacks; a year-on-year increase of 27%. Overall 374 companies in the index engaged in buybacks in Q3. These are the highest levels since the beginning of the financial crisis in 2007-08.

The proportion of company cash flow used for share repurchases has almost doubled over the last decade, while capital expenditure, which would improve company production and operational capability, has declined. The failure to make capital investments is reflected in the average age of company fixed assets, which has reached 22 years, the highest level since 1956. Capital investment is risky and has relatively slow returns; it is much easier to meet investor pressure for quarterly improvements, to quieten activist investors and to boost executive pay (substantially composed of shares and options) by means of buybacks.

Another avenue for increasing the size of capitals is through centralisation – mergers and acquisitions (M&A) of other companies. The last year has been a record year for M&A activity – some $3.5 trillion, up 47% from 2013. Ten of the year’s 15 largest acquisitions took place in the United States where volume climbed 51.4% to $1.53 trillion. Yet despite pouring trillions of dollars into buybacks and mergers, some $1.49 trillion in cash languished, uninvested, in corporate accounts.

The recovery has been built on a mixture of financial engineering and increased exploitation. Its beneficiaries have not been those who made it possible, but the very richest US citizens. In its wake are left the hidden unemployed and a huge proportion of the population who are living in poverty. This is the reality of the US ‘recovery’.

Steve Palmer

Fight Racism! Fight Imperialism! 243 February/March 2015


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