Large companies are doing well. Corporate profits bounced back very strongly after taking a hit in 2008 and are now at record levels. The chart below is a standard measure of profits after taxes and after some necessary accounting adjustments like depreciation and such.
Despite plentiful supplies of cash for large companies, they are not spending that money, which could help speed up economic recovery. Business spending, measured as private non-residential fixed investment, is still well below the prior peak, as the graph below shows.
Why? Well, there are two schools of thought, very simply summarized thusly: (1) Government is the problem and (2) Government is the solution.
The first school believes that all the new regulations coming out of Washington, such as the Dodd-Frank bill and the new health care bill, will make businesses very cautious about investment. Their reasoning is that why should they place a business bet when the rules of the game are not clear or may become less friendly. The government is the problem and has greatly hindered business activity.
The other school believes that we are in the aftermath of a great recession that requires a great un-leveraging of debt. That is, consumers are indebted and will slow down spending. Banks were overstretched during the boom and now need to rebuild capital. So businesses are well aware of weak aggregate demand and it would be utterly foolish to make a business investment when consumers will not be there to meet it. The private market of consumers is weak. Private businesses demand is therefore also weak. The only way to get out of this jam is to lift demand through government spending. Once the economic wheels begin to turn, the consumers will spend more and businesses will naturally follow.
Given that the government stimulus has already been applied (resulting in total failure in regards to creating jobs or in total success in terms of preventing another Great Depression, depending upon competing views), there appears nothing left to nudge up business spending.
However, a closer look at the graph does imply that business spending is on an upward trajectory. Furthermore, there is a residual stimulus measure for business spending still in place. Until the end of the year, business spending will get a 100 percent depreciation allowance, rather than the normal small percentage. Simply put, there is some tax incentive for businesses to spend money this year rather than next year. Let’s wait and see how fast or slow business spending turns in the second half of the year. This will determine if the economy (GDP) grows sluggishly at, say, 2 percent or robustly at around 4 percent.