When the financial crisis hit in 2008, aluminum prices crashed nearly as fast as stocks. So aluminum giant Alcoa did what it had to: It slashed capital investment, to $1.6 billion in 2009 from $3.4 billion a year earlier. It never came back. With prices still low, Alcoa's yearly investment is now $1.3 billion and falling, concentrated in a handful of specialty businesses that are still growing. Its stock has lost three-fourths of its value. And effective today, Alcoa is out of the Dow Jones industrial average.
"They're not generating as much profit, so they can't invest," Citigroup analyst Brian Yu says. "They're putting their capital where it makes the most sense."
Five years after the crisis, the "investment gap" that Alcoa exemplifies stands as one of the most enduring and disabling legacies of the Great Recession. Companies have held off on spending as much as $2.2 trillion since 2008, estimates the Progressive Policy Institute in a new report -- more than $500 billion just last year. That's translating into lower productivity growth, slower economic growth -- and fewer new jobs.
"When workers have older and less equipment, they produce less," PPI chief economic strategist Michael Mandel said. "It's a very simple connection."
It means lower wages, too. Median household incomes are still about $4,500 below 2007 levels, adjusted for inflation. One major reason is that low productivity growth means profit margins are narrower -- and that shrinks the pot of money that raises are drawn from, even with corporate profits still near all-time highs, says Carl Tannenbaum, chief economist at Chicago-based Northern Trust.
Excluding the energy industry's shale oil boom, investment economy-wide is lower than in 2007, Moody's Analytics says.
The problem is widespread, at even the zenith of American business.
Among the Dow industrials, companies such as Home Depot, General Electric, Cisco Systems, IBM, Visa and Johnson & Johnson are all still below 2008's capital spending. Dow component 3M's capital spending hasn't kept up with inflation, according to regulatory filings.
The biggest factor holding up investment is executives' still-shaky confidence, said Frank Friedman, chief financial officer of accounting firm Deloitte, which does regular surveys of CFOs. That will only ease when the economy posts stronger monthly job gains than it has recently, he said. Since April's gain of 199,000, the economy has averaged only 155,000 in the following four months.
"What drives confidence is seeing people get hired in the private sector," he said. "CEOs need confidence to make investment." (continued...)
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