Saturday, February 12, 2011

Corporations, Taxes, and the Unemployed...It's not it seems

Part I: American Corporations are riding high.  In 2006, the Dow broke the 12,000 point for the 1st time, and it did it again on February 1st after rising from the low of 6,547 less than two short years ago.  The difference this time is the P/E ratio (price to earnings) is 14.7 versus 22.7 in 2006.  What does that mean?  In simplest terms, corporations are making more money than ever and that is because costs have been cut dramatically while domestic sales lag.   Sales growth is coming from emerging markets and that is where companies are investing.  Earnings per share or EPS are at its highest point in nearly a decade and profits are up 17% over 2009 and companies are hoarding mountains of cash.  This cash is not being used to reinvest domestically or higher workers, instead firms are targeting acquisitions and conducting share buy backs.  Americans are more productive than ever and with the threat of cuts hanging over their heads.  I don’t see corporate America entering a hiring binge anytime soon.
Part II: The myth that American corporations cannot do business in the US because of our high corporate tax rate of 40% and marginal rate of 35%, second to only Japan in the developed world.  The 40% is what is called the statutory rate.  US companies through a series of credits, loopholes, and other maneuvering are actually paying closer to 25%, a true tax rate that is lower than Germany, Canada, India, China, Brazil, Japan, and Italy.  This is why the Treasury Department and Government Accounting Office (GAO) have said that a drop in the marginal rate from 35% to 27% would NOT yield any additional tax revenues.  Cry me a river Corporate America.
Part III: Real Unemployment data.  The table below includes unemployment data for several industries from 2005 – 2010.  A critical point of inflection is the September, 2008 date that Lehman Brothers failed.  What’s worth noting is the complete collapse in the construction industry that boomed, bubbled, and busted, and left behind as of February 2011 3.5million existing homes in inventory and tens of millions of unoccupied commercial property square footage.  As long as we are not building anything, it seems next to impossible to see how unemployment will ever get to 2006 levels…that is until we find our next bubble.
Industry
2005
2006
2007
2008
2009
2010
Construction
7.4
6.7
7.4
10.6
19.0
20.6
Manufacturing
4.9
4.2
4.3
5.8
12.1
10.6
Wholesale & Retail Trade
5.4
4.9
4.7
5.9
9.0
9.5
Transportation & Utilities
4.1
4.0
3.9
5.1
8.9
8.4
Information
5.0
3.7
3.6
5.0
9.2
9.7
Financial activities
2.9
2.7
3.0
3.9
6.4
6.9
Professional & Business Services
6.2
5.6
5.3
6.5
10.8
10.8
Education & Healthcare
3.4
3.0
3.0
3.5
5.3
5.8


So what the heck am I saying? 
1)      Our corporations and their mouthpiece the US Chamber of Commerce should stop bitching about the Obama administration’s attitude towards business.
2)      While I am happy to see production jobs come back (we added 58,000 manufacturing jobs in January) in 2010, we have a long way to go, and the only path back will be through small business who can expand.
3)      Employees in the Construction Industry should consider training to find another line of work.  Imagine how bad it would have been without the stimulus?

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