[F]inance was a crucial prop for profits in the two decades to 2007, with the banking industry expanding rapidly and industrial firms such as GE and General Motors building huge shadow banks. The regulatory clampdown since the financial crisis means this adventure is now over.
Third, after 2007-08 firms relied heavily on pushing down the share of their profits that they paid out in wages. But now there are hints that wages are rising. On October 14th Walmart said that higher pay and training costs would lower its profits by $1.5 billion, or just under 10%, in 2017. A week later Chipotle, a fast-food chain specialising in burritos big enough to ballast a ship, blamed falling margins on labour costs. If the share of domestic gross earnings paid in wages were to rise back to the average level of the 1990s, the profits of American firms would drop by a fifth.
Faced with stagnation, the quick fix is share buy-backs, which are running at $600 billion a year in America. They are a legitimate way to return cash to investors but also artificially boost earnings per share. IBM spent $121 billion on buy-backs over the past decade, twice what it forked out on research and development. In the third quarter its sales fell by 14%, or by 1% excluding currency movements and asset disposals. Big Blue should have invested more in its own business. Walmart spent $60 billion on buy-backs even as it fell far behind Amazon in e-commerce…. The Brazilian investment firm 3G has become a specialist in buying mature firms and cutting what it claims is fat. Sales at its most recent target, Kraft, are falling at a rate of 5% a year. 3G is the force behind the proposed $120 billion takeover of the brewer SABMiller by AB Inbev. Inbev’s volumes are shrinking at a rate of 2%. In America the telecoms, cable and health-insurance industries are consolidating. The aim is to create stodgy oligopolies.
Peak Profits: The Age of the Torporation, Economist, Oct. 24. 2015, at 59