Friday, November 26, 2010

What's up with those corporate profits?

It was in all the papers: corporate profits hit a new record in the third quarter of this year. It was kind of a meaningless distinction, Justin Fox editorial director of the Harvard Business Review Group, writes.
In a growing economy, even a fitfully growing one, corporate profits should hit new records on a pretty regular basis. And indications are that inflation-adjusted corporate profits are probably still slightly below the levels of before the Great Recession.
It's easier and probably more meaningful to measure profits simply as a share of the economy, Fox says. You can divide by national income. Here's a chart, going back to 1947, of after-tax corporate profits as a share of national income.

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. But it's still quite high by historical standards.

There is annual data to 1929, and the only time besides 2006 and (one can predict with some confidence) this year when the profit share topped 9% was 1929, when it hit 9.9%. Approaching a record set in 1929 doesn't seem like an auspicious sign.
Because there is very little analysis of this, Fox did his own:
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 1940s, and repeatedly topped 12% in the 1950s and 1960s; 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.
Who is doing better?
Well, according to the BEA's data, financial industry profits and "rest of world" profits — that is, the money U.S.-based corporations make overseas — are relatively much higher now than they were in the 1950s or 1960s. And the taxes paid by corporations are much lower now than they were then, as a share of national income.

So 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. Hmmmm.

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