News from "The Worst Economy Since Herbert Hoover"

[Haydnseek]

as John Kerry described it in 2004.

US groups boost share of economic pie

By Christopher Swann in Washington and Francesco Guerrera in New York
Published: June 4 2006 22:11 | Last updated: June 4 2006 22:11

US companies have increased their share of the economic pie at a faster rate over the past five years than at any time since the second world war.

Recent government figures show that profits from current production as a share of national income have risen from 7 per cent in mid-2001 to 12.2 per cent at the start of this year. This rate of growth is unprecedented since collection of these figures began in 1947.

Profits have climbed by 123 per cent over the same period, soaring from $714.5bn (€552.57bn, £378.89bn) to $1,595.4bn – also the fastest increase since records began. Other official data have shown that profit growth by manufacturing companies, often seen as one of the weakest sectors, has outstripped the rest of the economy. The figures suggest corporate America is enjoying one of its best periods despite more competition from low-cost countries and tougher corporate governance and disclosure rules.

Even during the boom of the late 1990s, companies only managed a 90 per cent increase in profits over a four and a half year period. Annual data on profits go back to 1929; there were faster rates of profit growth in the 1930s, as the US emerged from the great depression.

“Companies have had an extraordinary winning streak, that has lasted longer than most expected,” said Nigel Gault, director of US economics at Global Insight, an economic consultancy.

But he said: “It is unlikely that this is sustainable for much longer.”

The figures in the national accounts are the broadest measure of corporate profitability, measuring everything from Microsoft’s performance to an accountant working out of his garage.

As profits have increased as a share of national income, the return going to workers has been in decline, falling from 58.6 per cent in the middle of 2001 to 56.2 per cent in the first quarter of 2006. Paul Donovan, a global economist at UBS, believes the negotiating position of US workers may have been weakened by globalisation, giving companies the upper hand.

“The US labour market may be tightening, but there is still an ample supply of workers worldwide, and this may be capping what domestic workers can demand,” he said.

Over the past year, unit labour costs rose just 0.3 per cent – a downward revision from the first estimate. Since labour costs represent about 70 per cent of corporate ex-penses, the slow real growth in compensation, coupled with greater efficiency, has more than offset the impact of rising raw material prices for companies.

David Rosenberg, north American economist at Merrill Lynch, said competitive pressure had forced companies to slash healthcare and pension benefits for workers.

Fat margins and low compensation growth have been positive signs for the Federal Reserve. The minutes of the Fed’s May meeting showed members of the rate-setting open markets committee believe companies may initially choose to absorb any rise in costs by cutting profit margins rather than passing costs on to consumers.

Businesses have also benefited from low borrowing costs.

Net interest paid as a per cent of national income has fallen from 5.6 per cent to 4.1 per cent since mid 2001.

Find this article at:
http://news.ft.com/cms/s/a73094d4-f3f8- ... s01=1.html

[Ralph]

Happy days are here again?

[Corlyss_D]

And I remind the assembled ears of what I told John the other day:

Federal Revenues were up $11 billion over last year because of the tax cuts, a result the Democrats promised during the debates was physically and economically impossible.

[John Bleau]

In an interminable discussion on another board, I had to keep reminding my interlocutor that in a closed system, the benefits of tax cuts are offset by increased inflation and/or interest rates. In an open system, i.e., with foreign trade, they're offset by any one or more of increased inflation, interest rates or foreign debt. The last of these three has ballooned from an already huge amount. That tax revenues have increased by 11 bn (since when, the Clinton era? that would be a disastrous result) on the heels of a doubling of the trade deficit to 800 bn (and thus foreign debt) a year is an appalling result. I even chuckled at Corlyss' post, coming just as the stock market was beginning to deflate on voiced fears of inflation, a slowing economy and even mention of "the R word." Good timing, Corlyss.

[BWV 1080]

in a closed system, the benefits of tax cuts are offset by increased inflation and/or interest rates. In an open system, i.e., with foreign trade, they're offset by any one or more of increased inflation, interest rates or foreign debt.

So there is no such thing as investment and wealth creation?

[Corlyss_D]

I even chuckled at Corlyss' post, coming just as the stock market was beginning to deflate on voiced fears of inflation, a slowing economy and even mention of "the R word." Good timing, Corlyss.

Rumors of the death of this economy have persisted for close to 25 years. I'm still waiting.

[John Bleau]

I would suggest you do a logic diagram to show how it follows from my post that there is no such thing as investment and wealth creation.

[BWV 1080]

I would suggest you do a logic diagram to show how it follows from my post that there is no such thing as investment and wealth creation.

You state that

in a closed system, the benefits of tax cuts are offset by increased inflation and/or interest rates. In an open system, i.e., with foreign trade, they're offset by any one or more of increased inflation, interest rates or foreign debt.

you preclude the possibilty that the funds from tax cuts can be reinvested in the economy producing goods and services, i.e. creating wealth.

[John Bleau]

No I don't. I say that the growth comes with a debt. In other words, I say exactly what it is that you think I'm denying.

[BWV 1080]

No I don't. I say that the growth comes with a debt. In other words, I say exactly what it is that you think I'm denying.

No, that is not what you said - you said tax cuts are offset by higher interest rates, inflation or foreign debt. Obviously, moving from a recessionary environment to a recovery there will be some pickup in inflation and interest rates, but there has been real GDP growth aside from that. Morover the trade deficit cannot be blamed on the tax cuts, it is a much more complex phenomena.

Nowhere in your OP did you mention economic growth. I suppose when JFK slashed taxes in the early 60's, the only result was higher interest rates, inflation and/or foreign debt.

[Corlyss_D]

I suppose when JFK slashed taxes in the early 60's, the only result was higher interest rates, inflation and/or foreign debt.

No. When liberals cut taxes, it's a smart economically sensible benefit to the economy. When conservatives cut taxes it, it's a risky desperate move to get votes.

[John Bleau]

BWV, anything larger than a Chicken McNugget sound bite will make you gag.

"tax cuts are offset by higher interest rates, inflation or foreign debt" - you dropped my use of the words benefits of: "the benefits of tax cuts..." A significant omission making your interpretation of my initial post 180º wrong.

Corlyss seems to have forgotten the little falling out the USA had with France back in the sixties, over precisely the same situation China and Japan are in with the USA now, albeit in a much bigger way (I did point this out to you Corlyss). God forbid if China and Japan should stop underwriting the USA. Your econmomy is not dying (and I didn't say that it is), but it ain't nearly as healthy as the "tax cuts = increased revenues" crowd would have us believe.

[BWV 1080]

BWV, anything larger than a Chicken McNugget sound bite will make you gag.

"tax cuts are offset by higher interest rates, inflation or foreign debt" - you dropped my use of the words benefits of: "the benefits of tax cuts..." A significant omission making your interpretation of my initial post 180º wrong.

Corlyss seems to have forgotten the little falling out the USA had with France back in the sixties, over precisely the same situation China and Japan are in with the USA now, albeit in a much bigger way (I did point this out to you Corlyss). God forbid if China and Japan should stop underwriting the USA. Your econmomy is not dying (and I didn't say that it is), but it ain't nearly as healthy as the "tax cuts = increased revenues" crowd would have us believe.

No, I read your OP correctly. If you said the benefits were "partially offset" then I might agree with you, but the post was phrased like it was a zero sum equation

[John Bleau]

You read incorrectly and to pass on your inaccuracy, you omitted key words. Offset does not mean 90%, 100% or 110%, it includes those in the range. The fact is that the "tax cuts = increased revenue" crowd don't touch the trade deficit with a ten-foot pole in their sound bites, making the growth look like money growing on trees.

[BWV 1080]

You read incorrectly and to pass on your inaccuracy, you omitted key words. Offset does not mean 90%, 100% or 110%, it includes those in the range.

I did not omit "benefits" in my original response nor does the omission of the word make any difference in the meaning. If "offset" could mean 5% or it could mean 95% then your original post is rather meaningless. Compared to a recession, who cares if the result of real GDP growth is modest inflation or a pickup in interest rates which always coincided with a recovery anyway?

[Corlyss_D]

The markets and the world economy

Bears in the woods
May 25th 2006
From The Economist print edition


Despite the rattled markets, the world economy is still relatively strong. Just don't bet your house on it

Nature
Nature


IF YOU meet a bear in the woods, try not to panic or scream; on no account should you turn your back and run. As markets around the world have turned grizzly over the past two weeks, some investors seem to have forgotten the old hikers' maxim. After three years of big gains, many stockmarkets have tumbled by 10% or more in less than ten days. The loudest growls have echoed around emerging markets and commodities. Europe has surrendered most of this year's gains. Americans have so far escaped lightly, but they would be unwise to take comfort. Their housing market, the recent rock of their economy, is where a much grizzlier creature lies in wait.

Most investors tend to look first at equity markets—and they have certainly had a good run virtually everywhere. Yet a repeat of the slump after the bursting of the dotcom bubble in 2001-02 remains highly unlikely. In 2000 shares were wildly overvalued. Today price/earnings ratios in most stockmarkets are near, if not below, their long-term averages. This suggests that the slide in shares could be short-lived.

So what has caused this burst of volatility? One popular explanation conjures up fears of rising inflation and hence higher interest rates (see article). Yet this sits oddly with the fall in bond yields and the gold price over the past week: if inflation were the culprit, you would expect both to have risen. The real puzzle is not why volatility has suddenly increased, but why it had been so low in the past year or so. The answer seems to be an abundance of cheap money, which lured investors into complacency. Now they are starting to demand higher returns on riskier assets. Emerging-market equities and metals, not (generally safer) bonds, suffered the biggest mauling in the past week. It could be a healthy correction.

A formidable machine

Indeed, the recent jitters need not harm the world economy, which even bears admit has performed stunningly. World GDP has grown at an annualised rate of more than 4% for 11 consecutive quarters (see our economic and financial indicators). This is the strongest upturn for more than 30 years. Yet global inflation remains historically low. Strong growth with mild inflation is all the more amazing given the tripling of oil prices since 2003. Past oil-price shocks have caused stagflation.

The world has so far shrugged off higher oil prices with the help of two powerful economic forces. The first is the opening up and integration into the world economy of China, India and other emerging economies. This has given the biggest boost to global supply since the industrial revolution. Their cheap labour has cut the cost of goods. The threat that jobs in rich economies could move offshore has helped hold down wages. Although demand from emerging economies has fuelled the surge in oil and commodity prices, the newcomers' overall effect has been to curb inflation in the rich world.

That, in turn, has magnified the second stimulus. Since the bursting of the dotcom bubble, central banks have pumped out cheap money. In 2003 average short-term interest rates in the G7 economies fell to their lowest in recorded history. Because inflation remained low, the central banks have been slow to mop up the excess liquidity. Cheap money has encouraged households, especially American ones, to borrow and spend lavishly. It is not just house prices that have surged ahead; cheap money has encouraged investors across the world to take bigger risks, creating several smaller bubbles. Together the huge boost to supply (from emerging economies) and the huge boost to demand (from easy money) have offset the burden of higher oil prices, creating the once-impossible combination of robust growth and modest inflation.

Don't panic

The era of cheap money is nearing an end. For the first time in 15 years, the three big central banks are now all tightening monetary policy. The European Central Bank has already followed the Federal Reserve's lead in raising interest rates; the Bank of Japan has stopped printing lots of money and will start lifting rates soon. Only now are the markets realising that interest rates may rise by more than they had expected. In the long term, rates should be roughly equal to nominal GDP growth, but in America and elsewhere they are still well below it. Optimists argue that America's economy is coping well with rising interest rates, but it hasn't really sniffed tight money yet. Without easy credit, dear oil will cause more pain.

Until recently, financial markets appeared to be betting that the Goldilocks economy—neither too hot, nor too cold—was safe from the bears. The rattled markets are a reminder that sooner or later growth will slow or inflation will rise. Inflation is not about to spiral upwards but with diminishing spare capacity, it could edge up. America has an extra risk because Wall Street suspects that Ben Bernanke, the Fed's new chairman, may be a soft touch on inflation. If that suspicion persists, he will need to raise interest rates by more than otherwise—or investors will do the tightening for him by pushing up bond yields. That would make other assets look expensive.

It is in the American housing market that the bear may growl loudest. By borrowing against the surging prices of their homes, American consumers have been able to keep on spending. The housing market is already coming off the boil (see article). If prices merely flatten, the economy could slow sharply as consumer spending and construction are squeezed. If house prices fall as a result of higher bond yields, the American economy could even dip into recession. Less spending and more saving is just what America needs to reduce its current-account deficit, but for American households used to years of plenty it will hurt.

For the world, it is best that America slows today. Later, imbalances will loom even larger. A few years ago, Japan and the euro-area economies were flat on their backs. Now they are growing “above trend”, so the world depends less on America than it once did. The boost to the world economy from China and India will last into the future, even allowing for mishaps. Wise investors should resist the urge to flee, reduce their holdings of risky assets and stare down the bear.


Copyright © 2006 The Economist Newspaper and The Economist Group. All rights reserved.

http://www.economist.com/opinion/displa ... ID=6975848

[John Bleau]

BWV:

I am not quantifying how far the benefits are offset by the debt, only that they are offset by a consideration that is too often left out of the sound bites. That consideration, however, is 800 bn in added debts per year, so it's not likely that the benefits are only 5% offset. Pegging a reasonably exact percentage would be extraordinarily hard to do, given how many posts it has taken so far to try get a simple concept into your head.

[BWV 1080]

BWV:

I am not quantifying how far the benefits are offset by the debt, only that they are offset by a consideration that is too often left out of the sound bites. That consideration, however, is 800 bn in added debts per year, so it's not likely that the benefits are only 5% offset. Pegging a reasonably exact percentage would be extraordinarily hard to do, given how many posts it has taken so far to try get a simple concept into your head.

You seem unable to interact here without being personally insulting, every other post of yours in this thread has some sort of quip questioning my intelligence. Why don't you act like a grown up and accept that people will question blanket statements that you make or get out of here?

[Gregory Kleyn]

I'd get out of here, John, as Steve suggests, and quit hurting everyone's feelings, - (let alone banging your own head against the wall with these people).

[John Bleau]

Hi GK,

Yeah, but I think I'll stay. BWV is offended by my "blanket statements," yet calls a grieving mother "criminally negligent" for her courageous stand against pharma pimps and media whores. Hmm... I think I'll dredge that one up...