Productivity Growth and Corporate Underinvestment

Share buybacks have entered the realm of the new corporate orthodoxy.  Much as we have liked, and ourselves implemented, buybacks, they are now being used somewhat mindlessly, especially by mature technology companies, like Cisco and H-P.

When a corporate CFO says that "We see no better investment than our own shares," that statement shouldn't be allowed to pass without some clarification.  Likewise when the target of returning fifty percent of quarterly free cash flow to shareholders in the form of dividends and share repurchases is adopted, a question should be raised about how the math works on this kind of capital utilization.

These statements co-exist with the statements that cloud computing, for example, is the most disruptive technological change since Silicon Valley became a brand.  If this is true, and earnings are under pressure from short-term and long-term trends, then wouldn't it be better to invest in corporate internal projects to position the company for the new future?

Likewise, acquisitions when public market valuations are at local historical highs wouldn't seem to be obvious choices for use of cash.

Where may some of the fallout from these trends be seen?  Productivity, which is measured in many different ways, e.g. output per hour worked, total factor productivity, and capital per worker.  The macroeconomic analysis of productivity has always been a relatively weak area of economic research, but the various time series put out by our BLS do have the advantage of going back a long way.

Looking at one series, real output per hour worked for non-financial corporations, something noteworthy can be seen. The series is indexed to 2009=100, to coincide with the business cycle recovery. The linked chart shows the index at 107.1 in January of 2012, and stuck at 107.7 as of October 2013.

On a broader front, U.S. GDP growth fell to 1.9 percent in 2013, while hours worked rose by 1.1 percent, according to the Conference Board. So output per hour grew by 0.8 percent, and output per hour in manufacturing actually fell.

None of these trends bode well for labor incomes.  Companies like Exxon which are increasing their exploration and capital budgets are largely doing it outside of the U.S. as environmental regulations and energy policy politics make it rational for them to look for opportunities elsewhere.  Tech companies with huge cash hoards held abroad, which are then leveraged for share buybacks and dividends don't serve the long-term interests of shareholders.

Surely, there must be some politicians somewhere who could team up with corporate executives to create a framework for better capital allocation and investment in our businesses rather than in financial engineering. Continuing down this pathway may feed equity markets, but it won't fuel the economic future for the next generation of our labor force.