Companies choosing profits over productivity

Businesses aren't investing in their workers or their facilities, and that's dragging on output. And Wall Street rewards that behavior.

By MSN Money Partner May 16, 2014 3:09PM
Image: Stock market Up © CorbisBy Matthew Philips and Peter Coy, Businessweek

When the U.S. economy emerged from the recession in June 2009, productivity was rising at a fast clip. Companies had spent the downturn cutting jobs and were lean and efficient. 


Productivity -- output per hour worked -- jumped 5.5 percent in the fourth quarter from a year earlier as workers did more with less. 


But as the recovery has chugged on, productivity growth has stalled, averaging less than 1 percent a year since 2011. Workers were actually less efficient in the first quarter of 2014, producing fewer goods and services per hour than they had during the previous quarter.


Although there are many reasons for the productivity rut, one of the primary ones is that businesses aren't investing in their workers. Business investment fell almost 25 percent during the recession and hasn't come back the way many economists had expected, especially given that low interest rates make borrowing less expensive. 


Growth of capital spending during this recovery is about 30 percent below the average of the prior five recoveries, according to Bank of America Merrill Lynch (BAC). 


That's left many workers without the equipment, software, and structures -- which economists call "capital" -- that they need to be more productive. Whether it's a computer or a forklift, workers are stuck using outdated machines. The average age of equipment in the U.S. is 7.4 years, the highest in 20 years, according to the Bureau of Economic Analysis.


After growing only 0.5 percent in 2010, the amount of capital per hour worked fell 1.1 percent in 2011 and 0.8 percent in 2012. According to the Bureau of Labor Statistics, that's the first time capital per worker has declined since the agency began tracking the measure in 1987. 


Considering that business investment remained weak in 2013 and early 2014, "we are likely in an unprecedented fifth year of no growth in capital per worker," Ted Wieseman, an economist at Morgan Stanley (MS), wrote in a May 7 note to clients.


Equipment and software appear to be boosting output less than they once did. The government measures labor's contribution to economic output in terms of hours worked. It measures the corresponding contribution of capital (equipment and software) to the economy in terms of "capital services." 


Over the past 30 years, no form of capital has made workers more efficient than the computer. From 1995 to 2000 the capital services of computers grew at an annual rate of 40 percent. From 2007 to 2012 the rate slowed to 6.8 percent, and for 2012 it grew at no more than a 1 percent pace.


Just as higher productivity creates wealth that's shared by both workers and business owners, low levels of productivity make businesses less efficient and lower wages. Over time that can increase income inequality. 


"The only times since World War II that income inequality improved were during periods where the amount of capital per labor rose," says James Paulsen, chief investment strategist at Wells Capital Management. Prolonged periods of low productivity and investment eventually eat into growth. "By our estimates that's already coming true," says Wieseman, who lowered his potential gross domestic product growth rate to 2 percent.


It's not as if companies don't have money to spend. Cash on corporate balance sheets has increased almost 70 percent over the past four years to more than $2 trillion, the size of Russia’s economy. Profits are high, and employee compensation as a percentage of GDP fell to a 65-year low last year, according to the BEA. 


Companies that are spending their cash have largely chosen to increase dividends and buy back stock. Low growth and high levels of uncertainty have kept companies from investing in their own operations. Throughout the recovery, economic growth has consistently been below expectations, and executives remain wary of Washington after the government shutdown and the battles over the debt ceiling and fiscal cliff. 


"We're just seeing an abundance of caution," says Sandy Cockrell, who runs Deloitte's quarterly survey of chief financial officers. "We keep thinking business investment is going to pick up, but it just keeps disappointing."


A key tax break has also been downsized. Since 1983 businesses have been able to record as an expense new machinery and equipment. The result was a reduction in taxable profits. From 2010 to 2013 that amount was $500,000. But the deduction expired at the end of 2013; now companies can write off only $25,000, the lowest since 2002. 


"That's a big reason why my clients aren't buying new equipment," says Grafton Willey, former chairman of the National Small Business Association and a managing director at the Boston accounting and consulting firm CBIZ Tofias.


There may be an even bigger reason businesses aren't investing: Wall Street has rewarded those that don't. According to Morgan Stanley, companies that haven't spent on new equipment have outperformed those that have spent for most of the recovery. 


The situation could be set to change: For the last four months, companies with high levels of capital spending have outperformed those with low levels. Savita Subramanian, head of equity and quantitative strategies at Bank of America, thinks this could mark a turning point. 


Buying the stock of "companies with the largest share buybacks was the best performing strategy from 2012 through most of 2013, but is one of this year's worst," she wrote in a May 9 research note. 


This change in investor preferences could lay the groundwork for higher productivity growth. Workers may finally get those new computers.


More from Businessweek


Tags: BACMS
36Comments
May 17, 2014 4:32AM
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"But as the recovery has chugged on, productivity growth has stalled, averaging less than 1 percent a year since 2011. Workers were actually less efficient in the first quarter of 2014"

Well, the Working Poor and Fading Middle-Class after busting their buts off for Far less in spite of being far more Productive are Fed UP and Worn out. Also, maybe finally workers are finally wising up to the SCAM which is Boardrooms and CEO types. I mean Really, after over a Decade of Stagnant and or declining Wages, it's high times the Actual Workers benefits off their Labors instead of everyone else whom basically have done nothing more then BARK Loudly.

The Lack of proper Cap X spending and using Record Profits and Cash Hoard that the Workers produced only to reward mostly those that had little to do with the success of that Company, that's always a recipe for more companies failing longer term. All this financial Engineering just to Reward a group of already SuperRich Fat Cats.

Folks never seem to notice that the CEO types, regardless of their actual performance, can Bloat their own Pay and Benefits while gouging it off the Labors of others. Then they have the Audacity to tell Workers that Taxes are the Problem, well lower Corporate taxes hasn't  increased worker's Pay. In fact, many times what we see instead, CEO Types that double or even Tripled their take home pay and benefits. It's all a Scam against the actual workers and the actual workers better get a clue and fast before there's nothing left to fight over.
May 17, 2014 2:07PM
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No profit=no productivity or a job.
May 17, 2014 9:22AM
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Need to take the uncertainty away.   Business will invest when there is demand.
May 17, 2014 2:12PM
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Texas seems to be doing quite well.   Maybe that's because the business environment is so much better down here?  
May 17, 2014 4:49AM
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"Businesses aren't investing in their workers or their facilities, and that's dragging on output. And Wall Street rewards that behavior."


So the top 1% Ruling Class are once again using everything and anything to fake out everyone else while rewarding mostly themselves in the process. From a Bogus Credit Score System to a scam Direct Line to the Federal Reserve. To make things worse, we actually have folks within the Working Poor and Fading Middle-Class that support such continual BS. How else could the scam work.


We as a Society have allowed behavior that basically assures a structurally disadvantage to the Major of Americans. Folks have been brainwashed into thinking that everyone can be a millionaire when basically that's just Mathematically impossible. If everyone worked hard and reached their top potentially then Ironically you would by deduction have socialism. The Reality is that we would have the same Family and Friends network that reward a given inner circle while finding new ways to eliminate anyone else from fully participating in the wealth process.


One of the Biggest Scam going these days are Credit Scores and we still have a large number of ignorant folks defending that system. That system rewards the SuperRich while punishing the working Poor and Fading Middle-Class. Dumb and Dumber will always tell you otherwise. They will say BS like, "Well the only folks that have a problem with Credit Scores are folks with Bad Credit." Morons like that are just ignoring the issue. That's like saying the only Folks that have a problem with other Drinking heavily can't hold their Liquor. It avoids the conversation.

May 17, 2014 11:10AM
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How much capex is required for an economy expanding in 0.1% increments? 
May 19, 2014 4:20AM
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MirageGuy says, "Texas seems to be doing quite well.   Maybe that's because the business environment is so much better down here?"

Food Stamp Enrollment by State.
Texas
Total enrollment: 4,007,128

Top Ten Corporate Bankruptcies:
Energy Future Holdings, the Largest power company in Texas, filed for bankruptcy protection this year(2014) and owes $49.7 billion, mostly to hedge funds and investment firms. It's more than $36.4 billion in assets make it nearly tied for the 10th largest Chapter 11 filing ever.

Enron Energy company
Enron Corporation formerly an American energy, commodities, and services company based in Houston, Texas. At the time of Enron's collapse, it was the biggest corporate bankruptcy ever.

It must be true what they say about doing do everything Big in Texas. Apparently that also includes Massive Bankruptcies and having more folks on Food Stamps then any State in the Union but ONE. At the rate of all the massive Leverage going on these days, this is hardly the end by just the beginning of a New Age of failed Financial Engineering to sweep across not only Texas but the rest of America and the World as well.

May 17, 2014 10:30AM
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We invest in plenty of Companies that are growing and expanding, adding people or new areas (plants) or stores...


Albeit some are growing slowly over the last 4-5 years, It's CALLED coming out of a "Deep Recession"....And it's taking longer than normal to recover from...

Yes there is much uncertainty afoot...Many are only trying to survive..

And on the other side;

Are the Companies making more with less, increasing productivity, hiring "temporary or part time workers"....And yes some cutting wages and benefits; But that has almost always happened in "hard times".

Some are trying to survive, other businesses are taking advantage of workers available.

I'm sure that will change, as we get further down the road in recovery...Always has in the past. 

May 16, 2014 7:45PM
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Put business platforms, Wall Street and the Federal Reserve out of business. Restore America. BBQ those who oppose. 
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