Profits and shares slide as US boom falters
[Workers Power Britain November 2000]
The longest period of US economic expansion in history may be about to end. After nine years of growth and a huge surge in productivity in the last four years, US stock markets have fallen sharply since the spring and company profits are faltering.
The implications of this trend are immense since the US economy has been the locomotive of the world economy since the Asian crash of 1997, sucking in imports and capital investments from around the world. Should this stop, and with no alternative engine of growth, the world economy could enter recession next year.
The immediate problems lie in the results of US companies. Fears that Xerox's profits would be low cut the copier company's valuation in half and then when the fears were confirmed the shares' value were cut in half again.
Technology companies such as Dell, Intel, Apple, IBM, banks such as Chase Manhattan and a host of other companies collectively had hundreds of billions of dollars wiped off their market capitalisation when they announced their results.
Nasdaq, America's technology market, is down almost 40 per cent since March and actual profit projections were all down on the first half of the year. The Dow Jones Industrial average has fallen 10 per cent this year.
The boardrooms of corporate USA have had much to celebrate in the 1990s. Between the crash of 1989 and 1997 the mass of profits jumped 82 per cent; the profit rate increased during the same period by 28 per cent, getting back to its mid-1960s levels, and within 15 per cent of its post-war highs.
The stock market boom ("bull market") was unparalleled: Wall Street companies tripled in value between October 1987 and October 1997.
The critical period for the US economy was the period between the Asian crash of 1997 and the collapse of Russia's currency in mid-1998. Capital fled the stricken Asian region in a "flight to quality" and landed in Wall Street, boosting demand and prices for stocks and bonds.
Then the Russian currency collapsed and loans to the Russian government held by US and European banks were devalued by up to 90 per cent. Meanwhile a creeping decline in industrial output and earnings was visible in US company reports.
It seemed as though the stock markets would crash, and they did tumble 20 per cent over the six weeks from mid-August. But then with three interest rate cuts in October and November the markets rebounded, "market sentiment" improved and the financial markets reached to new highs.
During 1999 the continued startling improvements in productivity in 1999/2000 and the launch of many new internet dot.com companies in 1998 and 1999 restored confidence.
Between the spring of 1999 and spring of 2000 venture capital was available for any idea related to e-commerce however sound or unsound their business plan or expectation of future profits. What we have been witnessing in the last few months is the clear out of the least sound and most unprofitable of these ventures as the speculative bubble has been deflated.
The productivity improvements, due to new investments in new technology after 1995, are real enough Productivity improved in the range of 3 to 3.5 per cent per year over the last three years. What is remarkable is that such a huge surge in productivity normally occurs at the early post-recession stage of a business ex
pansion not, as now, towards the end of the cycle.
In part the gains can be explained by workers working harder for much the same wages, but most of it is due to the effects that new information and internet technologies are starting to have on cutting production and distribution costs.
So while the stock market bubble of 1999 was unprecedented and share prices did not reflect realistic expectations of future profits there were real improvements in profitability due to productivity changes.
What has changed recently is that profits are faltering and have knocked the stuffing out of the stock market. At the beginning of this year the profits of the US top 500 companies were 24 per cent higher than a year earlier; by the end of this year they are expected to be only 14 per cent higher. Worse, the rate of profit has fallen by 25 per cent during the last year as the mass of new investments are now getting less return as growth falters.
The US expansion has led to a huge trade deficit and massive increase in household debt. Both will prove significant over the next year. The trade deficit is due to the US sucking in all available capital, making the dollar very strong. This has made imports cheap and plentiful (capping inflation) but exporters struggle.
As the profitable outlets for inward investment in the US lessen then capital flows may move away from the US and the dollar is likely to lose value. But as the US has been the main engine of world growth the knock-on effect could be dramatic.
Household debt has risen sharply in the US during the expansion. High levels of domestic consumption have driven the US economy along in the 1990s. But this was driven not by real and sustained improvements in wage levels (which would have meant less profits) but by expanding credit card debt or spending on the back of booming share prices.
The end of the bull market in Wall Street and lower profits for banks are going to see debt-financed spending fall away, hitting company growth and profits.
It is going to be an interesting six to 12 months ahead.
[Workers Power Global December 2000]
Stock market frenzy turns to fear [May 2000]
US capitalism: markets in denial (pdf) [Trotskyist International 25, 1999]
Modern capitalism and crisis theory [Trotskyist International 25, 1999]