S&P500 Index Performance vs. US Economy- Now You Know Why They've Diverged

Finally, a really good, solid datapoint!

Tuesday's Wall Street Journal featured an article on the front place, top, of its Marketplace section with the headline,

"U.S. Firms Eager to Add Foreign Jobs"

The first paragraph said it all,

"U.S.-based multinational corporations added 1.5 million workers to their payrolls in Asia and the Pacific region during the 2000s, and 477,500 workers in Latin America, while cutting payrolls at home by 864,000, the Commerce Department reported."

Further, regarding the other important business input, capital, the article stated,

"The multinational companies, for instance, reduced capital-investment spending in the U.S. at an annual rate of 0.2% in the 2000s and increased it at a 4.0% annual rate abroad. Still, they allocated $2.40 in capital spending in the U.S. for every $1 spent abroad."

In summary, US-based multinational companies cut 864,000 workers in the US and added 2.9 million workers overseas from 1999 to 2009.

If this doesn't explain why the US economy and GDP growth are slowing, with stubborn unemployment, while S&P500 company profits continue to rise, what else do you need?

It also explains why business investment spending, while remaining robust, isn't helping US employment. It's reasonable to expect that much of that new investment spending is being serviced by overseas units and, thus, workers, of US-based companies.

No surprise to me. This is pretty much what I would have expected to see. This is simply the first solid piece of data on the phenomenon which I've seen.

If you heard interviews with the author of Steve Jobs' authorized biography, you may have heard him recount Jobs' frustration with US immigration policy. The story involved Jobs and Google chairman Eric Schmidt, at a White House dinner with its current occupant, explaining that a lack of US engineering talent forced Apple to build a facility in Southeast Asia, where the engineers were available. In addition to the hundreds of engineers, Jobs told the president, Apple also hired thousands of local workers for the production facility.

That, writ large, is what these recent Commerce numbers capture.

Shareholders of these companies should rejoice that the firms are doing what is economically best for them. That includes...ahem.....union members whose pension funds own shares of the S&P500 Index or companies therein.

I wouldn't go pillorying the executives or boards of these companies. They are simply reacting to global demand, costs, tax rates and regulatory environments.

The US Congress and administration should take note. This report illustrates Ricardian comparative advantage economics in action. And that clearly portrays a US labor market that has become overly-regulated, too expensive and difficult to accommodate in exchange for the presumed benefits. Thus, these multinationals find it more cost-effective to service overseas demand with overseas labor, capital equipment and facilities.