Thursday, September 23, 2010

The Great Recession Ended in June 2009, But Corporations are Prolonging It On Purpose

Yesterday, the news biz was abuzz with the National Bureau of Economic Research’s announcement that the Great Recession had bottomed out in June of 2009. In news report after news report, the fact was pointed out that regardless of what the NBER says, small businesses and individuals in most states are still struggling with unemployment and financial hardship.

This quote from the Desert Sun in Palm Springs, CA is typical of the sentiments.
Kevin Hampton, controller at Esser Air Conditioning and Heating in Cathedral City, laughed when told of the national panel’s announcement.
“I want to know what cave they live in,” he said. “(The recession’s) still going; it’s going to be on for a while.
“We had to downsize tremendously,” Hampton said. “Our summer season, we were busy, but not busy busy. People were cutting back; people were relying on other options for cooling; they were not running their (air conditioning) as much.”
It’s understandable that people would view the NBER’s announcement with bitter sarcasm; the recovery may have started on paper in June of last year, but for workers and small businesses, the recession is still going strong. The reason? Widespread unemployment and underemployment, which are forcing families to continue cutting back on spending and thus impeding the recovery for businesses that depend on such spending.

Today, the U.S. Bureau of Labor Statistics reported the unemployment figures (PDF) for August:
Regional and state unemployment rates were little changed in August. Twenty-seven states recorded unemployment rate increases, 13 states registered rate decreases, and 10 states and the District of Columbia had no rate change, the U.S. Bureau of Labor Statistics reported today. Twenty-six states and the District of Columbia posted unemployment rate decreases from a year earlier, 21 states reported increases, and 3 states had no change. The national jobless rate was about unchanged in August at 9.6 percent and also little different from a year earlier (9.7 percent).
The gist of many of the articles and news reports I read and heard yesterday seemed to be that people are angry and disenchanted with Democrats because the economy has failed to recover. But in fact, the blame for the lack of recovery lies squarely on the shoulders of large corporations, who have been racking up record profits for over a year without passing any of that recovery on to workers and consumers. For corporations, the recession really did end in June of 2009. But they’ve been deliberately holding out on the rest of us.

Two months ago, New York Times columnist Bob Herbert published a piece entitled “A Sin and a Shame,” in which he referred to an unnamed study by economist Andrew Sum. The gist of Herbert’s article was that American corporations had eliminated a great many more jobs during the recession than was actually necessary, and that they have failed to do any substantial rehiring or job creation even though the economy – at least for large businesses – has essentially recovered.
“They threw out far more workers and hours than they lost output,” said Professor Sum. “Here’s what happened: At the end of the fourth quarter in 2008, you see corporate profits begin to really take off, and they grow by the time you get to the first quarter of 2010 by $572 billion. And over that same time period, wage and salary payments go down by $122 billion.”

Economists believe the nation may have emerged, technically, from the recession early in the summer of 2009. As Professor Sum writes in a new study for the labor market center, this period of economic recovery “has seen the most lopsided gains in corporate profits relative to real wages and salaries in our history.”
Worker productivity has increased dramatically, but the workers themselves have seen no gains from their increased production. It has all gone to corporate profits. This is unprecedented in the postwar years, and it is wrong.
Reading this article really intrigued me. Like most other Americans, I was under the impression that corporations were still experiencing a lot of economic uncertainty and that it was that uncertainty that was preventing them from rehiring. So I decided to hunt down the study Herbert referred to in his article, finally locating it on the website of Northeastern University’s Center for Labor Market Studies.

This study, published in July, lays bare the statistical facts that expose U.S. corporations not as economic victims but as villains, driving up their profits by ruthlessly paring down their workforce and the wages of remaining workers, then pocketing the difference once production picked up.

The study’s introduction effectively sums up what happened and lays the groundwork for getting the details later. Emphasis is mine.
The U.S. economy entered into a recession at the very end of calendar year 2007 that has had a profound effect on the nation’s workers, sharply reducing employment levels, increasing the national unemployment rate above 10% by the end of 2009, and driving up the number of underemployed and the hidden unemployed… In contrast to the recent recovery of product output growth, labor markets continued to deteriorate through the end of calendar year 2009 with only a modest improvement in the first quarter of 2010. The recession of 2007-2009 was converted into a Great Recession for U.S. workers. …
Substantial shedding of employees and cuts in weekly hours of work by corporations allowed labor productivity to rise sharply after 2008. None of these productivity gains were shared by wage and salary workers in the form of higher real weekly earnings. These productivity gains were used to raise corporate profits at a higher relative rate than in any other post-World War II recession.
This table shows the trending of the GDP throughout and after the recession.

So, to be completely clear, productivity in the form of GDP decreased in that two-year span by 2.5%, but employment decreased by over twice as much! Or, as Professor Sum put it, “They threw out far more workers and hours than they lost output.”

Okay, maybe large businesses simply miscalculated or erred on the side of caution when cutting back on their payroll; it’s entirely possible they overreacted out of fear that things were going to get much worse than they actually did. So what happened after the recession troughed? What did large corporations do then?

The answer to that is… they raked in dough by the truckload. Have a look at the trending in corporate profits from Q4 2008 to Q1 2010.

That’s right – corporate profits rose steadily during that period, even before the recession bottomed out, ending in an overall gain of 57.4%, resulting in “the most lopsided gains in corporate profits relative to real wages and salaries in our history.”
These big run ups in corporate profits have led to an enormous rise in corporate cash on hand. These developments were spelled out in a recent Bloomberg Businessweek article in the July 12, 2010 issue titled “When Cash Takes A Vacation” by Robert Farzad. In early 2010, cash at the nation’s nonfinancial corporations stood at $1.84 trillion, a 27% increase from early 2007.According to Moody’s, “As a percent of total company assets, cash is at its highest level in half a century.” The nation’s hedge funds also increased cash in their portfolios up to 24% of their assets in June 2010. This compared to 19% just three months earlier.
Corporate profits since the fourth quarter of 2008 have fared far better than wage and salary payments to workers over the past 15 months. Corporate profits rose by $572 billion or 57% over the past 15 months while wage and salary payments to workers declined by $121 billion or about 2%.
Did everybody get that? Corporate profits WENT UP 57% while wages and salaries WENT DOWN 2%. The normal way for employers to respond when they experience recovery is to hire new workers, recall laid off workers, and restore hours that were cut back to existing workers. In this way, the recovery is passed around the whole economy as households begin to regain spending power and can once again buy goods and services from other businesses. But what happened this time was that corporations started to regain their profits and simply… kept them. And they are still keeping them, almost two years after their profits began to rise again.
The gains in labor productivity only went to raise corporate profits while workers got nothing except UI checks. Never before in postwar U.S. history did all of the national income gains over a 15 month period all go to corporate profits. The absence of job and real wage growth is reducing consumer confidence and the ability of households to spend, thereby holding down the economic recovery.

In the first nine months of recovery from the Great Recession, corporate profits before tax are estimated to have increased by $388 billion while aggregate wage and salaries only $68 billion higher than in the trough quarter. More than 85% of the gain in combined income for these two key categories of income went to corporate profits. This corporate profit share of income growth was a record high for the nation.

The extraordinary corporate profit share of income growth in the current recovery has no historical counterpart. As America’s workers might with justification claim, “We wuz robbed!” There was no worker reward for the increase in their labor productivity over the past 15 months.
The increase in corporate profits was derived entirely from a huge cutback on workers and wages since Q4 2008. Once it became clear that profits were trending upward, corporations should have begun a corresponding rehiring and wage increase phase that would fuel an economy-wide recovery. Instead, corporations have simply reaped the bounty of outrageous profits and pocketed the whole damned thing. Just look at the enormous jump in productivity that occurred over the course of 2009, while jobs continued to drain from the economy.

So, if corporations are hoarding cash, the logical question to ask is… why? To what end would they be hanging on to profits and keeping the economy depressed and the jobless rate high? The easy, obvious answer would be that a suffering, angry population may well punish Democrats at the ballot box in November for failing to right the economy, but I think that’s a simplistic analysis. It’s far from a sure thing that voters would overwhelmingly vote Republican, especially since the GOP has not managed to come up with any new ideas in the past two years.

I really think that corporations are stockpiling cash in part so they can take advantage of the Citizens United decision, funneling mighty rivers of cash into advertising (without their names associated, of course) with the intent of influencing voters toward the GOP. Then, if the Republicans regain control of the House or Senate, or both, employers will probably start rehiring, increasing hours, and creating jobs, so as to underscore the amazing effectiveness of the GOP at jump-starting the economy.

My conclusions here could be wrong, of course. But the data on which I’ve based them is definitely right. So if you think I’m wrong, tell me your theory of why American corporations aren’t doing their part to help their country recover.

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