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Monthly Archives: November 2009

Looking through some interesting data released recently (mainly bls, bea and census) and I managed to put together a couple charts are that are pretty interesting. The first looks at historic corporate profits and fixed capital information (these are from the NIPA accounts). As is obvious, fixe capital formation tracks profitability very closely. The notable departure from this trend occurred in the 1999 to 2002 era. I surmise three dynamics drove this. The first is the fact that there were many unprofitable companies (dotcoms and other service oriented no-hopers) that depressed profitability relative to gross investment. The second is the over investment in many tech oriented platforms, like software. Finally, let’s not forget the huge telco over investment at this point in time.
So the relationship reasserted itself and we had investment tracking the profit cycle very closely. Recently, however, this looks to be coming unglued. I think it may stay unglued for a while. Here is why:
First, companies need to be sure that a recovery is real before they start reinvesting. Many companies may be overlevered, so pouring cashflow into new projects may not be favorable compared to debt reduction if sales growth is not reliable. Second, and in my opinion, this is the reason, capacity utilization is so low. The capacity overhang is huge, having dipped as low as the high 60%s in durable goods. That needs to get absorbed, otherwise, there is no real need to re-invest, unless some new curve jumping technology comes along.

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