Here are my conclusions. Keep in mind that they are opinions.
1. Increased profits due to worker productivity improvements have been offset by reduced profits due to increased global competition.
2. There have been two profit bubbles in the last decade and we're currently in bubble #2. Heaven help this economy if and when corporate profits return to the median (again).
Update:
Here's an update of the charts I did previously using "per employee" instead of "per capita". The dollar index relationship still appears to apply.
See Also:
Corporate Profits vs. Dollar Index
Real Pre-Tax Corporate Profits per Capita
Source Data:
FRB: Flow of Funds Accounts
St. Louis Fed: All Employees: Total Private Industries
St. Louis Fed: CPI-U
St. Louis Fed: Trade Weighted Exchange Index: Major Currencies
Fantastic!!! What a step change in the bubble years.
ReplyDeleteWhich series did you use to get the graph?
I tried to replicate this with a quick-and-dirty FRED graph, and it looks slightly different (still shows a residual uptrend in the troughs, vs. your flat trend). Maybe my FRED curve for corporate profits wasn't the pre-tax version (although it didn't say "after-tax" like the other series did)...
I really think this one needs to get widely circulated.
I can think of three reasons for why the graph looks like this:
(1) Reported corporate profits surged in 2004 due to either the credit bubble or a bubble in fraudulent financial reporting (after the Enron guys got off with only minor haircuts, everyone did it in IBG-YBG mode).
(2) Profits are now being generated via globalization using non-US employees (who don't show up in the denominator). This might be sustainable. But if, in trying to avoid taxes, they don't repatriate the dollars earned overseas back here, there have to be currency/trade imbalances set up.
(3) Changes in the measurement of inflation. It was argued in the 1980s-1990s that there was a systematic over-reporting of inflation (leading to excess Social Security expenses etc.)... that would tend to keep the graph flat through the 90s. Then we switched to hedonics etc. and started to systematically under-report inflation, causing the graph to inflect upwards due to the hidden unreported inflation.
(4) Honest productivity improvements due to the internet and computers, which just all happened to show up in 2004 and which happen to be so unsustainable that we get huge credit crises...
Okay, that's 4 reasons, but 4 is clearly wrong! It isn't a productivity surge. In fact, if you believe this data, increased productivity could be a myth!
Maybe instead of "per employee" we need to normalize by hours worked? That would compensate for shifts in overtime and part-time work...
Oh, the possibilities. I'd like to post a version of this on my site with links back to this post...
But one thing this graph shows: something changed in 2004, and it didn't change for the better, because now no one believes our economy is sustainable and it's clear that the profits/gdp ratio is way out of line.
It's ridiculous for corporate profits to be this high with this much unemployment. Given the dearth of demand, there have to be a LOT of sticky prices due to inadequate competition, hidden monopolies and price-fixing arrangements...
Wisdom Seeker,
ReplyDeleteHere's a link to a similar chart done all within FRED. The only difference is that it uses after tax profits instead of the before tax profits I found in the FRB's Flow of Funds reports.
I used pre-tax profits because I wanted to exclude changes in tax policy from the long-term trend. The less variables the better when trying to understand the sustainable part of corporate profit growth (unless someone can convince me that corporate taxes can be reduced each and every year going forward, even when they hit a 0% floor).
Real Annual After-Tax Corporate Profits per Employee (April 2011 Dollars)
I think it is credit bubble activity, which would put my belief at #1 from your list.
I don't think it is #2 or we would have seen it appear before the dotcom bubble meltdown.
I don't think it is #3 because I don't think the changes to the CPI were all that significant (or I would not own TIPS and I-Bonds).
I don't think it is #4 for the sarcastic reasons you suggest. If it truly was #4 that inspired such prosperity, then what a coincidence that would be.
But one thing this graph shows: something changed in 2004, and it didn't change for the better, because now no one believes our economy is sustainable and it's clear that the profits/gdp ratio is way out of line.
For what it is worth, 2004 was the year I turned bearish. I think it is safe to say that I did not believe our economy was sustainable. I thought we were trying to borrow our recovery and I think the very same thing now.
Preview 2004: Investors’ Good Times Risk Rolling Right off a Cliff
"Give me a trillion dollars, and I can show you a good time, also."Warren Buffett, on the U.S. economy's response to government spending and tax cuts.