Corporations Increasingly Spending Their Cash Outside America

U.S. corporations have been slow to invest. That is, slow to spend money on new computers for their workers, or goods to stock their warehouses, etc. In the fourth quarter of 2006, slower inventory growth subtracted a large 1.2% from the GDP rate. Capital investment has somewhat rebounded in recent months, but is still lagging. Yet corporate earnings and profits have remained robust – Corporate profit margins were up to 14.5% in the 1^st quarter of 2007. Corporate earnings in the 2^nd quarter were 6.4% - the biggest gain in over a year. If it isn't because corporations are in a cash crunch, why aren't more of corporate profits being reinvested?

Admittedly, it's a complicated story to tell – the cost of capital, a surge in turning profits into dividends for shareholders and confidence of managers in the strength of consumer spending/their sector – are all key characters, and deserve their own blog column.

BusinessWeek (4/23/07) has written a very enlightening article on a lesser-told protagonist: It may not be that corporations aren’t spending their profits – it's just that they're not doing it the U.S. Official national economic indicators only capture investment in the U.S of A. BW’s own analysis of one-thousand large and medium-size U.S-based companies found that corporate global capital expenditures were up 18.1% in the 4^th quarter of 2006 over the previous year. Domestic expenditures were up only 8.9%, without adjusting for inflation.

BW makes the point that globalization means that corporations are global, and their spending/investing activities are also global – outsourcing manufacturing and other capital investment activities to lower-cost locales like China. Minnesota’s homegrown 3M corporation is a case in point:

“Out of 18 new [3M] plans or major expansions in the works, only seven are in the U.S...

"The bottom line is: If a company is investing in the U.S., there’s a good chance it’s buying computers or some other piece of machinery made overseas. And if a piece of capital equipment, such as construction machinery, is made in a U.S. factory, there’s a good chance it will end up being shipped abroad – perhaps even to help build a factory for a U.S.-based company that is expanding in another country.”