Corporate Profits

The amazing course of corporate profits under the Bush era:

Source: CEA-JEC Economic Indicators http://www.gpoaccess.gov/indicators/browse.html

Comments

[Alan]

You say that like that's a bad thing.

[Ken Houghton]

Just noting for the record that the jump in late 2004-early 2005 is from the 86% cut in tax for repatriating profits.

And, yes, Alan, the rise in undistributed profits is a bad thing--it implies money being wasted in corporate treasuries instead of stimulating the economy.

[ogmb]

Can we have this in bigger?

[Fred Hapgood]

> And, yes, Alan, the rise in undistributed profits is a bad thing--it implies money being wasted in corporate treasuries instead of stimulating the economy.

Doesn't a dollar stuck in corporate treasuries circulate the same as a dollar in your pocket? Assuming the deposits are left in a bank (as opposed to a cave somewhere) I would think that bank would have every motive to get those deposits out of bed and working. Is this not right?

[sd]

Ken,

Not neccessarily. The rise in undistributed profits could be funding capital expenditures and other business investments, which is generally a good thing.

[Simstim]

It's curious that there's a dip around about November 2004. I can't think what might have been happening then...

[Alan]

For the record, I was being ironic.

There is nothing wrong with corporate profit, but not when the trend continues to widen the gap between haves and have-nots. The "trickle down" concept is and always has been a con job.

[anne]

There are 2 puzzling and disturbing aspects of the rise in profits, the relative reluctance of corporate directors to invest and the relatively poor return to workers from rising corporate revenues.

Fred Hapgood is right :)

Even retained corporate earnings at the least contribute to the supply of capital, though ultimately invested in other ways than each corporation might invest.

[anne]

Given the massive energy company profits, lagging investment in energy exploration and development should be especially noted. Correspondingly, investment in various forms of real estate has been pronounced and we might wish a somewhat different balance. Still, as significant has to be the increase in return to capital at the expense of labor. Benjamin Friedman keeps cautioning us to worry in this regard.

[Bruce Bartlett]

What is really amazing is that the stock market has not reacted to this increase. It is still below its March 2001 peak. If corporate profits don't determine stock prices, what does?

[sd]

Bruce,

The stock market, if its functioning properly, reacts to expected future cash flows, not current reported profits. The stock market may not be reacting to the increase in profits for any of number of reasons, including:

1) The rise in corporate profits is an accounting fiction (As Ken Houghten alludes to above). Corporations are not performing as well as is indicated by this graphic, but rather, accounting rule changes are making it appear that there has been a big spike in corporate profitability when in fact there has been none.

2) The recent spike in profits has been unexpected, and the market does not believe that it will persist.

3) Corporations are re-investing the increased profits in projects that the market does not believe will lead to future growth.

4) The spike in corporate profits is occuring mostly in privately held businesses, including the increasingly large segment of US commerce owned by the private equity community.

5) The stock market is up quite a bit. It hasn't reached the March 2001 high because the March 2001 high was an irrational bubble-economy peak.

Could be other factors too. Who knows?

[anne]

Ah, Bruce :)

Profits have been remarkable, return on equity is attractive, corporate savings have been near record levels, but this is not an inexpensive market even 6 years after the peak. I am content with valuations, but this is not a time of bargains. Europe however has been awfully attractive for some while.

[anne]

Though the American market is still recovering and recovering slowly, there is an especially broad and deep international bull stock market both in domestic currencies and dollars. Indeed, the relatively strong dollar has seemingly spurred asset price increases internationally in domestic currencies.

[anne]

No; the rise in corporate profits has been public and real, but remember the astonishing valuations of 2000. Correction, even with such proifits has been slow. Then, again, look to the gains in the Vanguard value or mid cap or small cap value or real estate investment trust indexes or energy and health care funds. Finding value in 1999 ans 2000 has told remarkably, and value was there :)

[anne]

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Look to the Vanguard 10 year stock returns and you will find respectable returns over all in america and Europe and exceptional returns follow exceptional earnings and generally reasonable valuations for energy, health care and real estate sectors.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=3285&exhibition=14&u=261%7C2%7C...

Red-bellied Woodpecker Building Nest
New York City-Central Park Lake.

Bruce, you are always pleasing even when I argue with your arguing :) Fred, as well :)

[Charles]

Um, guys?

The rise in corporate profits would be A Good Thing, except for this minor detail:

They were financed by the blood of thousands of people killed by war, an enormous rise in the national indebtedness, and our national reputation.

This is not hyperbole, just fact. The tax rates shown in the graph are not all that different. Corporate America didn't suddenly become much more efficient or creative. What happened is that oil prices went way up: more corporate profits. Defense contractors got buckets of money: more corporate profits.

The nation has been badly wounded. This is not something to celebrate.

[Robert]

So oil going up drove up corporate profits. I typically like to read multiple views on issues but these blogs and comments have gotten to the point they are just stupid. Time to remove this crap from my feed. Have fun living in your own little worlds.

[me]

6) Lack of business investment. Stock buyers do not see future revenue streams or growth if the companies are not investing in the business.

For example, I was reading today that France averages 24MBPS broadband including TV and phone for about $36.

In the great, capitalist US, broadband averages only 1.5MBPS, and with TV and phone is about $90.

You might say that is good for US investors, except that broadband access is not growing at those prices and people aren't connecting, and, half of say Comcast’s assets are good will or the value of franchises or some other vapor profit. That could explain why Comcast was $40 five years ago and $26 today.

[sd]

Charles,

And I presume you've gathered the appropriate data and analyzed, quantitatively, the balance between higher oil company profits vs. the additional costs incurred by, um, every single industry that has to transport any material goods from any point A to any point B? Didn't think so.

Higher energy prices weigh down the profits of airlines, shipping companies, manufacturing companies of every type, agricultural companies, retailers, lodging and entertainment companies. Construction firms, defense contractors, wholesalers, packaging companies, newspapers, fast food operators. All take a hit on profits when energy prices are high.

But hey, who needs facts when you have a Cause (tm)?

[reason]

Robert,
Oil companies HAVE made HUGE windfall profits. Where HAVE you been!

If you really are going for good, enjoy YOUR small world.

[cb]

Would this be equivalent to a $320 B jump on the graph?

Treasury Gives Corporations
Latitude on Overseas Profits
January 14, 2005
WASHINGTON -- The Treasury Department is giving U.S. companies a broad interpretation of how they can repatriate and spend overseas profits under a special one-year tax break.
[...]

Last year, big companies lobbied for a tax cut on their overseas profits as a way to spur U.S. job growth. U.S. companies have earmarked about $320 billion in overseas profit to bring back to the U.S. to take advantage of the tax break, according to an analysis by Greg Kelly of Susquehanna Financial Group.

[anne]

Whether the sky may fall there is no knowing, but we can look up and take precautions and that is just what investors may be doing internationally. The international bull stock market that is as impressive as any I know of, increasingly appears to me to have a component of growing American demand for international assets.

[anne]

What is remarkable about the international energy price increase is an absence of recession. Growth has been healthy is almost every developed and emerging economy through this period and healthy international stock prices reflect this as well as the relatively attractive valuations.

The exception may be New Zealand, where the central bank has been especially tough about short term interest rates for reasons that I do not understand.

[spencer]

This is where the big productivity gains are showing up rather then in wages.

[spencer]

This is where the big productivity gains are showing up rather then in wages.

[anne]

Yes; productivity has been growing sharply and feeding gains in corporate revenue which are going to profits rather than wages and benefits. This gain in profits relative to wages and benefits appears unique in these 60 years.

[anne]

How difficuolt it has been to get energy companies to invest in exploration and development is marked by the support of a $20 billion subsidy for such investment included in the energy bill passed last summer. Then too, there is the massive avoidance of royalties for use of oil and gas on public lands by the energy companies. This avoidance is worth about $20 billion.

[anne]

http://www.nytimes.com/2006/03/28/opinion/28tue1.html?ex=1301202000&en=c70b435ed4cdfbf4&ei=5090&partner=rssuserland&emc=rss

March 28, 2006

Big Oil's Big Windfall

A public already groaning under huge deficits does not need more red ink. An oil industry already rolling in record profits does not need more tax breaks. But both are sure to happen unless some way can be found to claw back from a decade's worth of Congressional and administrative blunders, aggressive lobbying and industry greed.

According to a detailed account in Monday's Times by Edmund L. Andrews, oil companies stand to gain a minimum of $7 billion and as much as $28 billion over the next five years under an obscure provision in last year's giant energy bill that allows companies to avoid paying royalties on oil and gas produced in the Gulf of Mexico.

The provision received almost no Congressional debate, in part because Congress was lazy and in part because the provision was misleadingly advertised as cost-free. The giveaway also seemed a natural sequel to a measure passed in 1995 to provide royalty relief. But that measure came at a time when oil prices, and new investment in oil and gas exploration, had declined. It also included an important safety valve: in any year when oil prices exceeded a threshold, about $34 a barrel, companies would have to resume paying royalties.

However, in what appears to have been a bureaucratic blunder, the Clinton administration omitted that crucial escape clause in all offshore leases signed between the government and the oil companies in 1998 and 1999. It seemed a harmless mistake at a time when oil prices were still below $20 a barrel. But times changed. Prices have been above the cutoff point since 2002, and an estimated one-sixth of the production in the Gulf of Mexico is still exempt from royalties for no good reason whatsoever.

That blunder was compounded, again and again....

[Pete]

Um, I hate Bush as much as the next guy, but aren't economists supposed to consider all of the data and make a reasoned analysis, not simply point to a chart and say "Bush bad!"? Brad?

[Ari]

Pete, the words are entirely yours. Brad simply presented the chart.

[Pete]

Ari: are you joking? Above the chart it says: "The amazing course of corporate profits under the Bush era:"

[NinjaPlease]

The repatriated funds will be used to pay dividends (at a 15% tax rate maximum) back to stock holders.

Can someone make a timeline of new domestic manufacturing plants that have opened up during 2005 for that nice repatriation tax cut (I think the marginal rate was set for 15% instead of 35%)

Along with worker's wages for 2005

Along with corporate profits? It would be nice to see where the money was spent.

The problem with these rediculous tax cut policies that supposedly increase the number of jobs or worker's wages, is that THERE IS NO FEEDBACK LOOP FOR ERROR CORRECTION.

[Ari]

Pete; as has been pointed out by others on the thread the rise in profits during this Presidency is clear and sharp and that was Brad's point.

[anne]

http://www.nytimes.com/2006/03/29/books/29geog.html?ex=1301288400&en=0b0e23d13db2419a&ei=5090&partner=rssuserland&emc=rss

March 29, 2006

How Pink Slips Hurt More Than Workers
By THOMAS GEOGHEGAN

Is the layoff the great American wound? In Louis Uchitelle's account, it seems a wound in triplicate. It hollows out companies so they can't compete. It hollows out the country by removing middle-class jobs. It hollows out the middle-class employees who are laid off and then too often drop permanently to a demeaning, low-wage way of life. To Mr. Uchitelle, who reports on economics for The New York Times, corporate America's addiction to the layoff has gone past the point of economic rationality. In this fascinating book he tries to tell the history of the United States in our time as the unchecked rise of layoffs.

"The Disposable American" is a history in which odd characters like Pat Buchanan, the former chief executives Jack Welch and Albert J. Dunlap (known as Chainsaw Al), the economist Alfred Kahn and others loom large — but so do Jimmy Carter, Bill Clinton and Robert E. Rubin, former secretary of the treasury. But Mr. Uchitelle is just as interested in ordinary people and in the way that layoffs keep tormenting those who have been let go. As he writes, "I did not think in the early stages of the reporting for this book that I would be drawn so persistently into the psychiatric aspect of layoffs."

The layoff, Mr. Uchitelle argues, has transformed the nation. At least 30 million full-time American employees have gotten pink slips since the Labor Department belatedly started to count them in 1984. But add in the early retirees, the "quits" who saw the layoffs coming, and the number is much higher — a whole ghost nation trekking into what for most will be lower-wage work. This is the Dust Bowl in our Golden Bowl, and to Mr. Uchitelle, layoffs in one way are worse than the unemployment of the 1930's. At least then, most of the jobless came back to better-paid, more secure jobs. Those laid off in our time almost never will.

Mr. Uchitelle effectively wrecks the claim that all this downsizing makes the country more productive, more competitive, more flexible. He is willing to admit that downsizing can be necessary. "The global economy is not to be denied," he writes. But to lay off is now like a business school tic, whether it makes any sense or not. With fewer employees, many companies begin to crumble. Innovation also suffers. "Rather than try to outstrip foreign competitors in innovation, a costly and risky process, we gave up in product after product," Mr. Uchitelle writes. As he points out, many of the business stars now are companies, like Southwest Airlines, that have refused to downsize at all. A growing number of economists argue that layoffs cause more problems than they solve.

The heart of Mr. Uchitelle's book is his detailed, wide-ranging reporting. He is present, taking notes, while airline mechanics are being counseled into job training that will take them into lower-wage work. If they were not so painful, these moments would have a certain droll comedy. One mechanic ends up running a water taxi for tourists. Another goes into maintenance. Others find jobs "throwing boxes" at Federal Express. As one of the ex-mechanics tells Mr. Uchitelle years later: "It is hard to look in your son's eyes and explain to him that you are making $12 an hour and know his high school friends are making that much on the side."

In one of his shrewder moves, Mr. Uchitelle goes right into the enemy camp, as it were, and looks in on a reunion of Harvard graduates, the class of '68. But even Harvard grads are among the wounded now — some have received pink slips. Mr. Uchitelle makes a strong case that the whole middle class is at risk. During the Clinton era, the claim was that the United States was expanding high-wage, high-skilled jobs, and that the laid off could simply jump into jobs as good or better. But Mr. Uchitelle takes apart this argument. After all, he writes, as of 2004, more than 45 percent of American workers were earning $13.25 an hour or less. The jobs that the country has been "growing" the fastest include those like janitor, hospital orderly and cashier.

It nettles Mr. Uchitelle that even the center-left politicians have said so little about this trend — or have done so little to stop layoffs....

[anne]

Coming soon :) a certain Brad DeLong has glowingly reviewed Louis Uchitelle's book for the New York Times.

[anne]

http://economistsview.typepad.com/economistsview/2006/03/disposable_amer.html#c15551046

Mark Thoma -

Without endorsing every detail, I like the approach in Flexicurity as well as some of the points in the paper by Blanchard European Unemployment: The Evolution of Facts and Ideas. Here are some points from the paper:

From both the macro evidence and this body of micro–economic work, a large consensus—right or wrong—has emerged:

* It holds that modern economies need to constantly reallocate resources, including labor, from old to new products, from bad to good firms.

* At the same time, workers value security and insurance against major adverse professional events, job loss in particular. While there is a trade-off between efficiency and insurance, the experience of the successful European countries suggests it need not be very steep.

* What is important in essence is to protect workers, not jobs.

* This means providing unemployment insurance, generous in level, but conditional on the willingness of the unemployed to train for and accept jobs if available.

* This means employment protection, but in the form of financial costs to firms to make them internalize the social costs of unemployment, including unemployment insurance, rather than through a complex administrative and judicial process.

* This means dealing with the need to decrease the cost of low skilled labor through lower social contributions paid by firms at the low wage end, and the need to make work attractive to low skill workers through a negative income tax rather than a minimum wage.

This consensus underlies most recent reforms or reform proposals ...

I think both sides have something to learn - the European system appears to be too inflexible, but there are lessons for the U.S. to learn from the European system as well, in particular one of Blanchard's bullet points is worth repeating, "Protect workers, not jobs."

[anne]

http://economistsview.typepad.com/economistsview/2006/03/disposable_amer.html#c15551441

March 29, 2006

Disposable American Workers

Brad DeLong reviews Louis Uchitelle's new book "The Disposable American":

Louis Uchitelle has long been one of The New York Times's best economics reporters. ... Now he has written his first book, "The Disposable American," about large-scale layoffs and the harm he sees them doing to the country. Uchitelle believes Americans have acquiesced in permanent mass layoffs because of three myths: (1) that they are a necessary step to make companies better, stronger, more efficient and more productive; (2) that it is the laid-off workers' own fault if they fail to find near-equivalent new jobs in the modern economy; and (3) that layoffs are primarily an economic affair that ought to be decided upon by managers looking at their corporation's dollars-and-cents bottom line.

To Uchitelle's attack on these three myths I want to say yes, yes and yes....

[Charles]

Robert and Ed, there is a certain kind of people from whom being called an idiot is a compliment.

So, thank you very much.

Also thank you very much for the detailed refutation demonstration that pre-tax oil company profits have declined and that the margins of all transportats have declined as a result of increased fuel costs, which I am sure you will deliver in due course to fill certain...um...gaps... in your argument.

Then we'll talk.

[Ari]

Jim Glass is playing games again to prove this is the best of all possible times for us all though especially for himself, as though Brad could no longer read a graph. Imagine my surprise.

[anne]

Jim, OK, I am slow but I get your points. Sorry to be so curt, and thank for responding or I would have failed to understand.

[Ari]

Thanks for explaining, Jim, but I am not sure I understand. As a portion of national income, profits are now supposed to be lower than in 1997 and employment compensation higher than in 1997. Why does this not seem right to me? Anne?

[sd]

Ari:

Who knows why this doesn't seem right to you. Because you have ideological bias toward assuming that corporate profits MUST be higher and employment compensation MUST be lower, given the party in the White House?

[anne]

No; as usual Brad DeLong was quite right in the projection of a profit surge to record levels on recovery from the brief recession in Novemeber 2001, and Ari was right not to understand the complaint about Brad. Profits have risen markedly these last 5 years, while wages have lagged the increase.

[anne]

http://www.epinet.org/

March 31, 2006

Gross domestic income: profit growth swamps labor income

Today's data release from the Bureau of Economic Analysis (BEA) shows that the share of corporate profits in gross domestic income (GDI) reached the highest level since the 4th quarter of 1968. In the corporate sector, the current recovery has seen the largest swing from labor incomes to corporate profits of any recovery since World War II.

[anne]

http://www.epi.org/content.cfm/webfeatures_snapshots_20060330

Snapshot for March 30, 2006.

Gross domestic income: profit growth swamps labor income

Data released by the Bureau of Economic Analysis (BEA) today show that in the fourth quarter of 2005 corporate profits claimed the largest share of gross domestic income (GDI) in 37 years.1 The last time profits claimed this large a share of GDI was in the 4th quarter of 1968 (see Figure A ). Since the last business cycle peak (the first quarter of 2001), the share of GDI going to corporate profits has risen by 3.9 percentage points, while the share going to labor compensation has fallen by 1.4 percentage points.

Figure....

Within the corporate sector, where all income is classified as accruing to either capital (profits plus net interest) or labor (wages plus benefits), the picture is even starker: labor's share of corporate income has fallen by 5.6 percentage points, and capital income's share rose by the same amount. Corporate profits' share rose by 7.8 percentage points, while net interest payments shrank by 2.2 percentage points. This rise in corporate profits' share is, by far, the largest that has occurred 19 quarters after a business cycle peak since World War II, and it is about eight times as large as the average shift that has characterized previous recoveries (see Figure B ). If these shares had remained constant, labor incomes as an aggregate would be $346 billion higher today.

Figure....

While productivity growth has been strong during the current recovery (averaging annual growth of 3.5%), the fruits of this growth have disproportionately flowed to profits instead of wages and benefits. This strong productivity growth provides the potential to generate broad-based increases in American living standards, but, so far corporate profits have been the only clear winner.

[anne]

The surge is productivity growth these last 5 years has benefitted capital far more than labor.