Wednesday, June 27, 2012

U.S.economy , profit rates, investment and internal funds



In a recent post Doug Henwood of the Left Business Observer provides an interesting analysis of the relationship between profit and investment. Henwood includes onegraph that shows profit rates from the nineteen fifties until now and another that shows the relationship between internal funds and capital investments over the same time period. Both graphs are for non-financial institutions.

Until 2011 the rate of profits have been rising during the recovery. But they perhaps have peaked now. Economic recovery seems to be slow in the U.S. Henwood notes that neo liberal policies were successful in restoring profit rates close to what they had been earlier.

One of Henwood's graphs is interesting because it shows that even though there is plenty of cash to invest with strong corporate cash flows, companies are investing at a rate that one would expect during low profit levels periods even though levels are still high.

In my view, one of the main reasons for the lack of investment is the considerable uncertainty about the economic future. In this situation companies simply will not take the risk of investing. They will wait until the future is more certain and promising. Even though actual profit rates are high and many companies are doing quite well even during this period of low growth, the future is just too uncertain and so investment lags even though the present rate of return on capital is high.

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