The trend in US corporate profits is what you think it is
In my research for an article about the cross section of national income, I ran across this piece in Forbes by Tim Worstall. In this article, he uses proprietary Bloomberg and WSJ data for 2012 corporate offshore cash holdings to assess that corporate profits abroad are driving a reasonable share of the increase in the BEA’s measure of corporate profits: (see my post from Monday, or Ed Dolan’s post from June):
“there’s a simple enough explanation for at least part of it: simply globalisation.
Now what is it that we know about American companies and their profits? Something that has rather changed over the past decade or so? Yes, that’s right, we’re in a huge period of globalisation. So much so that US companies are now making very large profits outside the US economy. Apple AAPL -1.58% is making phones (or having made for it) in China and selling them in Europe. This isn’t, in any real sense, part of the US economy. The same goes for Google GOOG -1.53%, Microsoft MSFT -11.37% and however many other companies you want to study. Profits are being made offshore, out there in the global economy.”
But this is just wrong. According to the Bureau of Economic Analysis (see Table 12 of the BEA Q1 2013 release), aggregate corporate “rest of the world” profits – i.e., large US corporations with earnings abroad – declined $8.9 billion in 2012.
The surge in 2012 corporate profits occurred on account of domestic corporate profits rising 10% to $1.5 trillion in 2012.
True, corporations have gone global but that does not explain the surge in corporate profits since the end of the financial crisis. The surge has been home grown.
So yes: the trend in US corporate profits is what you think it is.
4 Responses to “The trend in US corporate profits is what you think it is”
"True, corporations have gone global but that does not explain the surge in corporate profits since the end of the financial crisis. The surge has been home grown."
Interesting analysis but it begs the question" what is driving this 'home grown surge'? Consumer spending has been weak, unemployment continues to trouble. From whence the demand that drives this surge?
The Forbes piece was a total red herring when you consider that the issue everyone's discussing isn't high profits per se, but the high share of GDP taken by profits. That ratio only ever counts domestic profits. Foreign-earned profits can't be a factor by definition.
The simplest explanation for the rising profit share of GDP is to be found in the Levy-Kalecki profit equation, which tells you that profits = investment + dividends + public deficit – current account deficit – personal savings. A simpler way to understand this is that aggregate profits are the income that businesses receive that doesn't come out of the wages they pay or taxes assessed on them or their employees. Investment adds to profits because the company spends without reducing its assets.
During the bubble profits were inflated by very low personal savings, substantial public deficits and high investment in real estate. After the crash they were inflated by public deficits and improving current account which overwhelmed the rise in personal savings. Recently they are under pressure from fiscal consolidation but being supported by a drop in personal savings.
If you want to know what drove domestic profits look at the spread between unit labor cost and the deflator for corporate output. You find this data in the BLS productivity report.
The spread between the two was unusually wide early in the recovery and even though it has narrowed it is still positive.
That's only another way of measuring the profit share of GDP. To understand why it's growing, you have to look at where the additional business income is coming from other than wages.