The Real Story Behind US Corporate Record Profits

One of the major news stories yesterday was the figures released by the US Bureau of Economic Analysis that showed US corporate profits hitting a new record in third quarter this year. But that’s not quite accurate. According to Harvard Business Review, the US corporate profits has in fact been even higher once before – in 1929!

“The reason that corporate profits are near their all-time highs would appear to be that financial corporations – mainly big financial corporations – and multinationals are making lots of money and paying less of it out in taxes.”

Justin Fox


Editorial director at Harvard Business Review, Justin Fox, makes some interesting observations of the yesterday’s big news about US corporates making all-time-high profits in Q3 this year. As usual, statistics can be used to prove almost anything, Mr. Fox points out.


US Corporate profits hit a new record in the U.S. in the third quarter of this year.

Well, that was the headline after the data were released Tuesday.

Editorial director Justin Fox at Harvard Business Review hits the bullseye with the following comment:

“It was kind of a meaningless distinction: In a growing economy, even a fitfully growing one, corporate profits should hit new records on a pretty regular basis.”

Of course! That’s the whole point of economic growth, right?

But Mr. Fox makes several other – not so obvious – observations:

“Indications are that inflation-adjusted corporate profits are probably still slightly below the levels of before the Great Recession (the Bureau of Economic Analysis doesn’t adjust the main corporate profit number for inflation, because — given all the profits that flow in from overseas — it doesn’t know what inflation rate to use),” he writes in a new blog post.

According to Justin Fox, it’s easier and probably more meaningful to measure profits simply as a share of the economy.

(Sounds logical, too.)

“You can divide by either gross domestic product or national income — I do the latter below because it’s more of an apples-to-apples comparison, plus it involves downloading fewer tables from the BEA.”

“So here’s the chart, going back to 1947, of after-tax corporate profits as a share of national income :”

(click on the image to see a larger version)

 

“You might not be able to tell this from the chart, but the third-quarter 2010 profit share, at 9.46%, is slightly below the peak of 9.58% in the third-quarter of 2006.”

Anyway –  it’s still quite high by historical standards. And the chart only goes back to 1947, that’s as far back the quarterly data goes.

But there is annual data going back to 1929, and the only time besides 2006 and this year, when the profit share topped 9% was in 1929, when it hit 9.9%, Mr. Fox writes.

“Approaching a record set in 1929 doesn’t seem like an auspicious sign.”

According to Justin Fox and Harvard Business review, economists have surprisingly few answers to what exactly such a high profit share mean.

“There’s been lots of work done on the meaning of cyclical shifts in corporate profits — basically, a profit upswing usually precedes a broader economic boom. But I’ve been looking since the late 1990s for good explanations of secular shifts in profits, and found very little — and I’m not the only one.” he writes.

“When confronted with such apparent gaps in economic knowledge, my natural tendency is to fire up Excel and start playing with the numbers. I do this not as a trained economist or statistician, but just as a guy who sort of knows how to use Excel (although I find the latest Mac version awfully confusing).”

Here’s the main discovered:

  • Pre-tax domestic nonfinancial corporate profits — a mouthful, but also seemingly a fair measure of the underlying health of business in America — are nowhere near record levels as a share of national income.

.

  • They exceeded 15% of national income once in the late 1940’s, and repeatedly topped 12% in the 1950’s and 1960’s; in the third quarter of this year, they were 7.03% of national income.

This might go some way toward explaining the seeming disconnect between booming corporate profits on the one hand and a very cranky business community on the other. For much of the business community, profits aren’t that high by historical standards.

“These people have every right to be cranky.”

So what is, in fact, doing better?

The answer comes as no surprise to this blogger:

“According to the BEA’s data, financial industry profits and “rest of world” profits — that is, the money US-based corporations make overseas – are relatively much higher now than they were in the 1950’s or 1960’s. And the taxes paid by corporations are much lower now than they were then, as a share of national income.”

“The reason that corporate profits are near their all-time highs would appear to be that financial corporations (mainly big financial corporations) and multinationals are making lots of money and paying less of it out in taxes.”

In other words: The money is increasingly going to a select group at the very top of the economic food chain, who are able to reap the rewards of global growth, play the financial system astutely, and avoid taxes.

“You can spin this in a moderately positive way: these are very dynamic economic times, and the rewards are going to those companies and individuals who position themselves to take advantage of this dynamism,” Justin Fox points out.

But concludes:

“There are an awful lot of negative ways you can spin it, too.”

(Original post here.)

 


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