March 29, 2017

Corporate Profits Hurdle Recession

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:

  1. 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.
  2. 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.
  3. 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.

Comments

  1. goofydawg says:

    “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.”

    The paragraph above a little disturbing to me, in that it seems to put a positive spin on corporate profit. It can also be read as corporations profiting by working their current workforce harder, while paying them less. Rates are just a ratio of production versus workforce size. And while unemployment rates have gone down slightly, as heralded by our administration, the number of unemployed workers out of work 27 weeks or more has not decreased significantly. Also, the average work week for works remains unchanged at 34.3 hours. Those indicators illustrate a “slack demand” and possibly deflation.

    All in all, I think the drop in unemployment is encouraging, but it is way to early to say that the administration’s plan is actually working. I personally need to see more of a track record.

    • I see how it’s possible to read the respected paragraph as “corporations profiting by working their current workforce harder, while paying them less.,” but there are other factors that could explain how corporations could increase productivity and decrease labor costs. One of these major factors could be technological advancement, which could lower labor costs and simultaneously increase productivity. Especially considering your statistic of the average work week remaining unchanged in March, which is also where it was throughout the 4th quarter, technological advancement may be the greatest contributing factor for the increased profit and decreased labor costs of corporations.

      Altogether, I agree more of a track record needs to be seen before ruling the Obama Administration as having steered a recovery in the economy. Though, some argue a recovery in corporate profits must precede a recovery in domestic labor. With eight consecutive profitable quarters, this stability may encourage corporations to invest in domestic labor. However, the consumer price index is steadily rising, particularly due to rising energy costs, as well as food costs. This relative instability could deter domestic investment and prevent the unemployment rate from continuing its modest trend of overall job growth. Also, corporations may begin to keep more cash on hand in preparation of a crisis, so an acceleration of investments in domestic labor may still be far off. In the end, job growth will continue a modest trend at best and a significant acceleration in domestic labor is unlikely. Clearly, a verdict on the Obama Administration’s handling of the economy at this time would be ripe and therefore requires much more data.

Speak Your Mind