While a full recovery of the US economy remains in the distance, corporate profits have already achieved a complete recovery. During the fourth quarter of 2010, corporate profits hit an all time high of $1.678 trillion, according to the latest data [.pdf] from the Bureau of Economic Analysis. These fourth quarter results not only show more corporate profits than ever before, but they also mark the eighth consecutive quarter with a growth in corporate profits.
Keep in mind that October, November, and December were not exactly prosperous months for the US economy, yet corporations still managed to reap more profit during this quarter than ever before. In contrast to corporate profits, other indicators of the US economy were not as strong during the fourth quarter, including:
- The housing market – new home sales during each month of the fourth quarter are among history’s top ten months with the least amount of homes sold per month. Residential home values also declined at least 1% during each month of the fourth quarter.
- The energy market – gas prices gradually increased throughout the fourth quarter. At the beginning of October, the national average for a gallon of gas was $2.78, but rose to $3.10 by the end of December. The average price for a gallon of gas increased in nine of the thirteen weeks in the fourth quarter.
- The labor market – Even though the economy gained 282,000 jobs throughout the fourth quarter (151K jobs in Oct., 28K in Nov., & 103K in Dec.), the unemployment rate remained at a historically high rate above 9% throughout the fourth quarter.
Despite these weak indicators of the US economy, corporations were simultaneously able to increase their profit margin. One explanation for how corporations are raising profits amid a relatively weak economy is an increased production rate, as well as a decreased compensation rate. During the fourth quarter, productivity increased 2.6%, according to the Labor Department. At the same time, labor costs fell 0.6% in the fourth quarter. In other words, corporations produced more at a lower cost.
This pattern is also visible on an annual scale. Productivity increased 3.9% throughout 2010, while compensation expenditures decreased 1.5%. Either one of these factors would benefit the profit margin for corporations, but the combination of lower costs and higher productivity certainly boosts profits for corporations, even amid a relatively weak economy.
Corporate profits have been at or above the pre-recession level since the beginning of 2010. Throughout 2010, domestic profits grew 37% and international profits grew about 9%, reflecting quite a turnaround for corporate profits in 2010.
Without doubt, corporations have not only recovered from the great recession, but corporations are stronger than ever before. In fact, corporations currently have a record amount of cash on hand with almost $1.9 trillion in banks, according to the Federal Reserve.
Despite this record amount of cash, corporations remain largely hesitant to invest into the US economy. Domestic job growth has been positive, albeit especially modest. Regardless of the wavering US economy, the bottom line for US corporations has never been better.