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Sunday, August 31, 2014

Small but positive news

Tony Paradiso

Forget everything I said about the government’s compulsion to continually cover old ground.

The first – but not last – revision of second-quarter GDP is in, and it’s good news. The estimate was raised from 4.0 percent to 4.2 percent growth. ...

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Forget everything I said about the government’s compulsion to continually cover old ground.

The first – but not last – revision of second-quarter GDP is in, and it’s good news. The estimate was raised from 4.0 percent to 4.2 percent growth.

Amazingly, economists predicted a revision of precisely 0.2 percent. Not so amazingly, they thought it would be 0.2 percent lower, not higher. For the economic community, that still constitutes a major accomplishment. At this weekend’s Labor Day barbecues, they can tell their friends that they got the size of the revision exactly right.

“On balance, today’s revisions, though small, should be seen as positive news for the growth outlook and make us more confident in our projection of continued solid growth” BNP Paribas economist Laura Rosner told her clients.

I wonder what BNP Paribas’ clients fork over for such investment insight? Without Rosner’s guidance, I would never have concluded that a 5 percent increase in second-quarter growth would have been categorized as small but positive news.

Really, I want one of those jobs in my next life.

Investors will be happy to know that after two consecutive quarterly declines, corporate profits surged in the second quarter. The Commerce Department reported that after-tax corporate profits, without inventory valuation and capital consumption adjustments, hit a seasonally adjusted annual rate of $1.84 trillion. That represents a 6 percent increase from the first quarter, and although not adjusted for inflation, it’s the highest level on record.

Given this positive news, I’m perplexed that a recent Wall Street Journal/NBC poll found that 71 percent of Americans believe the country is on the “wrong track.”

How can that possibly be? Stock markets are repeatedly breaking records, corporate profits are at an all-time high – what’s not to like?

Sure, one reason corporate profits are on the rise is because they have reduced hiring and learned how to do more with less. That’s a good thing, isn’t it – at least if you’re employed? It could be much worse. The private sector could be following federal government guidelines and doing less with more.

And I realize that the top 5 percent in terms of wealth own somewhere around 70 percent of all outstanding equities. But consider this: A 2013 Pew Research Center survey found that 53 percent of Americans say they have no money at all invested in the stock market, including retirement accounts. That’s leaves almost a third of all stocks to be divvied up among 42 percent of the population. That isn’t too shabby.

And when you factor in how beneficial it is for the rich to get richer so they can create the jobs that pay the salaries for the rest of us, it seems like maybe the middle class is being a bit greedy wanting almost an entire third of the stock market pie.

There was some good news in the WSJ/NBC poll. Seven out of 10 Americans blame the malaise on President Barack Obama and Congress more than structural problems with the recovery.

Why is that good news? For one, it proves the average American has the ability to discern reality. And two, Americans don’t believe the problems are structural.

They are only partially correct about the latter. Our economic problems aren’t structural, but our political problems surely are.

When the average American realizes Washington is the problem, and all our other maladies are merely symptoms of that core problem, maybe then we’ll be able to reverse the trend.

Tomorrow is Labor Day, although some might suggest we rename the holiday “Unemployment Day” or maybe “Stock Ownership Day.” Harold Meyerson, columnist for the Washington Post, laments that Labor Day is a “mocking reminder that this nation once honored workers.”

In his column, Meyerson notes that William Lazonick’s “Profits without Prosperity” is the seminal essay on U.S. corporations. He describes Lazonick, a professor at the University of Massachusetts Lowell, as “one of the few economists who actually performs empirical research.” What a novel concept.

Meyerson claims the reason only luxury and dollar stores are thriving can be found in Lazonick’s numbers. Some of those include ExxonMobil devoting 83 percent of its net income to stock repurchases and dividends, and having 73 percent of its CEO pay stock-based; and Cisco devoting 121 percent of its net income to repurchases and dividends, and 92 percent of its CEO pay being stock-based.

Lazonick examined the S&P 500 from 2003-12 and found that stock buybacks consumed 54 percent of companies’ net earnings. Another 37 percent of total earnings went to paying dividends. That doesn’t leave much for “discretionary” spending like R&D, expansion, or wages.

A little over 30 years ago, corporations allocated less than half of their profits to shareholders. But according to Lazonick, after Ronald Reagan’s Securities and Exchange Commission removed any limits on stock repurchases, the floodgates opened.

Lazonick found that from the mid-1940s to the 1970s, major U.S. corporations retained most of their earnings and reinvested them into technology, expansion, and worker training and pay.

That was certainly a different economic time, but it would be hard to argue that the corporate profit pendulum hasn’t swung too far in the stockholder direction.

Tony Paradiso is an author, professor, entrepreneur, radio and TV commentator, and marketing and management expert. His website is at www.tonyparadiso.com.