Companies Choose Profits Over Productivity

Source: Matthew Philips and Peter Coy, businessweek, May 15, 2014

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. 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 Whether it’s a computer or a forklift, workers are stuck using outdated machines.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. …. 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. …. 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….