By David J. Lynch - Jan 17, 2013 12:00 AM ET
Tom Donohue, the president of the U.S. Chamber of Commerce, last week said higher taxes and a “flood of new regulations” will damage an already subpar economy. “In many ways, we’re going backwards,” he said.
Such complaints, echoed by corporate executives throughout President Barack Obama’s first term, obscure one fact: American business has never had it so good.
U.S. President Barack Obama. Leigh Vogel/WireImage
U.S. corporations’ after-tax profits have grown by 171 percent under Obama, more than under any president since World War II, and are now at their highest level relative to the size of the economy since the government began keeping records in 1947, according to data compiled by Bloomberg.
Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy.
Business leaders cite low labor costs in an era of high unemployment, the Federal Reserve’s easy-money policies, and their own management savvy for the profit boom. Prosperity has come in spite of the president, not because of him, they say.
“I don’t think he deserves any credit,” John Engler, president of the Business Roundtable, a Washington-based association of chief executive officers, said in an interview.
Economists disagree. In a February 2012 survey, 80 percent of senior economics professors said unemployment was lower at the end of 2010 than it would have been without Obama’s stimulus spending. A July 2010 study by Alan Blinder, former Federal Reserve vice chairman, and Mark Zandi of Moody’s Analytics, said the stimulus, bank rescues and Fed policy “probably averted what could have been called Great Depression 2.0.”
Profits are more than twice as high as their peak during President Ronald Reagan’s administration and more than 50 percent greater than during the late-1990s Internet boom, measured by the size of the economy.
Business leaders cite low labor costs in an era of high unemployment, the Federal Reserve’s easy-money policies, and their own management savvy for the profit boom. Prosperity has come in spite of the president, not because of him, they say.
“I don’t think he deserves any credit,” John Engler, president of the Business Roundtable, a Washington-based association of chief executive officers, said in an interview.
Economists disagree. In a February 2012 survey, 80 percent of senior economics professors said unemployment was lower at the end of 2010 than it would have been without Obama’s stimulus spending. A July 2010 study by Alan Blinder, former Federal Reserve vice chairman, and Mark Zandi of Moody’s Analytics, said the stimulus, bank rescues and Fed policy “probably averted what could have been called Great Depression 2.0.”
Political Confrontations
Extending the climb in corporate profits this year is expected to grow more challenging as labor costs rise with increased hiring. CEOs say they also face uncertainty over new health-care rules and taxes. Washington’s repetitive political confrontations threaten to further lengthen their odds.
For four years, American business has seen the Democratic president as a tax-and-spend advocate of big government who was intent on imposing red tape. Some criticized him for a lack of experience in business.
In the presidential campaign, business groups spent millions of dollars on Republican candidates in a bid to unseat Obama. Former General Electric Co. CEO Jack Welch even accused the White House of manipulating unemployment data for political advantage.
‘Clumsy Instrument’
Still, executives dislike the prospect of economic volatility even more than they dislike the president. So they’ve become reluctant White House allies in the current battle over raising the nation’s $16.4 trillion borrowing limit, which the government could hit as early as next month.
“We don’t want to reach the point where our government, in some fashion, is unable to make interest payments or is unable to pay our vendors,” said Engler, a former Republican governor of Michigan. He called the debt limit “a clumsy instrument” to force spending discipline.
Donohue told Bloomberg Television on Jan. 10 that defaulting on the U.S. debt would be a “mistake” and that lawmakers should refrain from using the borrowing limit to push for cutbacks in programs.
Bond investors, who would suffer most directly if the government defaulted on its debt, aren’t worried. The yield on the 10-year note, a benchmark for everything from mortgages to corporate borrowing costs, is lower now than on Aug. 5, 2011, when Standard & Poor’s downgraded the U.S. during the last debt ceiling showdown. The yield on 10-year Treasuries was 1.82 percent as of 5 p.m. in New York yesterday.
Denting Confidence
Business leaders say a prolonged political showdown could dent consumer confidence or unsettle equity investors. In 2011, the Standard & Poor’s 500 Index (SPX) fell almost 17 percent in the 11 trading sessions following the breakdown of debt-reduction talks between the White House and congressional Republicans. The Conference Board’s consumer confidence readingdropped to its lowest level in more than two years.
Washington dysfunction threatens to scuttle a period of high profitability and rising share prices. Across the economy, corporations in their third-quarter earnings reports posted stellar profits.Caterpillar Inc. (CAT)’s earnings-per-share rose more than 32 percent from the same period the previous year while Yahoo Inc.’s grew 67 percent.
The S&P 500 index has risen more than 80 percent since Obama was sworn in on Jan. 20, 2009, as of yesterday. That’s the biggest gain under any president since at least World War II.
Slowing Growth
The debt-limit fight comes as the economy likely is growing at an annual rate of just 1.5 percent in the first quarter, although it will expand 2 percent during the year, according to the median forecast of 91 economists surveyed by Bloomberg. At a Jan. 14 news conference, the president called default a “self- inflicted wound” that could trigger a new recession and called on Republicans “to pay America’s bills on time.”
“Investors around the world will ask if the United States of America is in fact a safe bet,” Obama said. “Markets could go haywire, interest rates would spike for anybody who borrows money.”
Many companies, including small businesses, say the White House itself is casting a cloud on the economy.
They complain about excessive regulation and a tax-first, cut-spending-later approach to deficit reduction. The administration has completed only one-third of the 447 regulations mandated by the Dodd-Frank financial regulation act, Donohue said in a Jan. 10 speech in Washington.
‘Extraordinary Confusion’
Provisions of Obama’s health-care law, which is intended to expand insurance coverage to tens of millions of Americans, are creating “extraordinary confusion” for businesses, he said.
A monthly index of business sentiment maintained by the National Federation of Independent Business, was at 88 in December, a low level that, prior to the financial crisis, wasn’t seen since the 1980 recession.
William Dunkelberg, NFIB’s chief economist, said the group’s members anticipate a “pretty lousy first half of 2013.”
Corporations are holding more than $1.7 trillion in liquid assets, reflecting uncertainty over future policies. They’re investing in capital projects only 80 percent of their available internal funds, according to data compiled by Bloomberg. Though that figure is up about one-third from late-2009, that ratio has been below 80 percent only once since the end of 1958.
“We’re in the curious position where businesses are net savers,” said Paul Ashworth, chief U.S. economist at Capital Economics Ltd. “This net saving is a problem. It’s because businesses are too cautious.”
Amy Brundage, a White House spokeswoman, didn’t return an e-mail asking for comment.
Spending More
Since the end of 2009, corporations have been gradually putting more money to work. Liquid assets as a percentage of total corporate assets, which peaked at 6.3 percent in the fourth quarter of 2009, fell to 5.5 percent of assets by the third quarter of last year, the latest Federal Reserve data available.
That’s still above the 5.2 percent average over the past 20 years, though below the 5.9 percent Bush administration high in 2005’s fourth quarter.
Companies survived the “searing experience” of the financial crisis by becoming more efficient, Engler said. More than four years of the Federal Reserve’s near-zero interest rates also opened the door for companies to pay off high-cost borrowings. Last year, U.S. corporations issued more than $1.5 trillion in debt, up from $1.2 trillion the year before.
Labor Costs
In recent years, high unemployment kept labor costs in check while output surpassed pre-crisis levels. Employee compensation rose 7 percent from the end of 2008 through the third quarter of last year. That was less than half the increase registered in either of President George W. Bush’s terms. Workers’ compensation is claiming a 54 percent share of the economy, down from 59 percent as recently as 2001 and the lowest mark since March 1955.
Through 2011, profits rose in tandem with the jobless rate. Over the past year, as the unemployment rate fell, earnings continued to climb, a trend that may be losing steam.
“It’s a maturing earnings cycle, which is going to be decelerating in 2013,” says Stephen Wood, chief markets strategist for Russell Investments with $159 billion in assets under management.
To contact the reporter on this story: David J. Lynch in Washington at dlynch27@bloomberg.net
To contact the editor responsible for this story: Cesca Antonelli at fantonelli@bloomberg.net
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