Monday, June 6, 2011

Corporate Profits Revisited Yet Again

This is an update to an earlier post and is inspired by the discussion going on over at Retirement Blues in this post.

December 7, 2007
Corporate Profits

Forgive me for saying so, but isn't economic softness and intensified competition a rather bad combo for continued fat corporate profits?



In hindsight, the question I asked in December 2007 (the official start of the recession) had quite the answer.

As seen in the following chart, I'm thinking of asking that very same question again. Go figure.



The charts are slightly different because I'm using after tax profits instead of total profits. The conclusion is the same. Danger!

Here's a bonus question. Why does it cause so much pain for us to revert to the median? (This is a rhetorical question with just a hint of sarcasm.)

In any event, reversion to the median is generally just a matter of time and I see no reason to think why this time would be any different.


See Also:
Corporate Profits Revisited

Source Data:
St. Louis Fed: Custom Chart

30 comments:

Jerry Critter said...

It would appear that in the last 10 years or so, corporations have managed to loosened the ties between wages and profits. They use to loss of profits to cut wages, but fail to restore those cuts when profits return.

Stagflationary Mark said...

Note that profits before tax have actually fallen compared to wages over the years (except for this most recent period). See the red trend line in the first chart.

Karl Marx predicted that corporate profits would eventually go to zero as increasing competition squeezed all profits from the system.

In my opinion, our government has tried to offset this long-term pattern by lowering effective corporate tax rates and by increasing government borrowing to boost the economy. Those games won't work forever though. Sigh.

Stagflationary Mark said...

Jerry Critter,

If every corporation continues to cut workers in order to boost profits then eventually there will be no workers and no profits.

In other words, I do no think that we will be on the road to sustainable prosperity unless we can actually create jobs.

wsm said...

A couple of comments/questions:

Regarding your conclusion "reversion to the median is generally just a matter of time and I see no reason to think why this time would be any different..." Without attaching any time frame to your 'prediction', it is hardly a prediction at all. In investing, timing matters.

Regarding "The charts are slightly different because I'm using after tax profits instead of total profits." What is the difference between after-tax vs. total profits?

The charts merely show that wage/salary currently comprises a lower proportion of corporate profits than median historical levels. First question is, are the wage/salary figures used here strictly private sector? If so, then this series will not be a great predictor of GDP, since the public sector wage/salary amounts have ballooned to egregious levels. Secondly, regardless of whether this series is strictly private sector or does indeed comprise the full picture, what is the implication you are trying to convey? For the lack of more elegant wording, 'who cares'?

mab said...

Stag,

I have similar charts. You might want to separate profits into financial and non-financial profits.

Sustainable profits come from sustainable wages. Credit (DEBT!) is another matter.

Jerry Critter said...
This comment has been removed by the author.
Jerry Critter said...

SM,
I agree. We need to create jobs...HERE. Corporations are creating jobs, but not in this country. We need to make it more profitable to do the work here than "over there".

Stagflationary Mark said...

wsm,

Without attaching any time frame to your 'prediction', it is hardly a prediction at all. In investing, timing matters.

So when housing prices were well above their historical inflation adjusted norms but I couldn't decide exactly when they would fall, then I should have simply ignored the information?

Regarding "The charts are slightly different because I'm using after tax profits instead of total profits." What is the difference between after-tax vs. total profits?

Just compare the two charts. The first is before taxes and the second is after taxes.

First question is, are the wage/salary figures used here strictly private sector?

Yes.

If so, then this series will not be a great predictor of GDP, since the public sector wage/salary amounts have ballooned to egregious levels.

You realize of course that government workers make up just 17% of the workforce and the total number of government workers has been declining.

Secondly, regardless of whether this series is strictly private sector or does indeed comprise the full picture, what is the implication you are trying to convey?

Corporate profits are at unsustainable levels compared to wages just like they were the last time I pointed it out in 2007.

For the lack of more elegant wording, 'who cares'?

Based on your questions, I would guess that you do not care.

Stagflationary Mark said...

mab,

Sustainable profits come from sustainable wages.

That's certainly my take on it. Few seem to care though.

Stagflationary Mark said...

Jerry Critter,

We need to make it more profitable to do the work here than "over there".

That's the motivation behind lowering corporate tax rates and offering corporations incentives.

Unfortunately, "over there" responds in kind and we all just race to the bottom.

I have no solution to the problem, which just proves that it is often far easier to see a problem than it is to fix a problem.

Jerry Critter said...

The incentives have to be more direct than tax cuts. Tax cuts do not create jobs. At best, they increase profits.

Two things come to mind. Tax overseas profits more than profits here, or increase tariffs so that products made here can be sold for less than similar products made "over there".

Stagflationary Mark said...

Jerry Critter,

Warren Buffett's solution makes sense to me and I suspect it would to you too.

I don't think it will happen though. The pain of doing it is too much for people to accept. Unfortunately, the pain of not doing something similar will be even greater someday. Sigh.

wsm said...

SM,

I definitely did not mean to imply that I do not care. On the contrary, I am quite interested in getting clarification on what your point is.

When you say "Corporate profits are at unsustainable levels compared to wages just like they were the last time I pointed it out in 2007..." it seems to imply that you think this relationship will revert to the mean.

This would indicate one of 2 outcomes: 1) a general rise in wages (massively stimulating aggregate demand and therefore, GDP), or 2) a drop in corporate profits driven by a different component of the cost structure (i.e. not wages).

I guess my overall question that I cannot glean from your post is, which of these scenarios are you calling for? And more importantly, what do you see as the catalyst?

Also, the gov't workers graph that you linked to seems to show a pronounced upward trend line, which does not seem to support your comment that "the total number of government workers has been declining."

Stagflationary Mark said...

wsm,

I definitely did not mean to imply that I do not care. On the contrary, I am quite interested in getting clarification on what your point is.

I'm sorry for misreading your tone. I can see now that you do care.

When you say "Corporate profits are at unsustainable levels compared to wages just like they were the last time I pointed it out in 2007..." it seems to imply that you think this relationship will revert to the mean.

Yes, that is what I believe.

This would indicate one of 2 outcomes: 1) a general rise in wages (massively stimulating aggregate demand and therefore, GDP), or 2) a drop in corporate profits driven by a different component of the cost structure (i.e. not wages).

Yes, I believe that sums it up nicely. I don't think it will be #1 though (at least not wages here in the USA anyway).

I guess my overall question that I cannot glean from your post is, which of these scenarios are you calling for? And more importantly, what do you see as the catalyst?

I am torn between various outcomes and none of them are pleasant.

1. We experience yet another deflationary event. Housing prices are falling again. Commodity prices are high enough to actually crash again, as is the stock market.

2. We experience stagflation. The high price of gasoline is having an effect and the economy is beginning to slow.

3. We could experience a bit of both simultaneously. Think of it as stagnation.

Put another way, I think we've got too many restaurants for the real prosperity I see headed our way. We're not on a sustainable path.

Also, the gov't workers graph that you linked to seems to show a pronounced upward trend line, which does not seem to support your comment that "the total number of government workers has been declining."

Yes it does, but we're talking about predicting the future and the most recent year has been in decline. I should have made that clear in my reply though. Here's a better chart to see the most recent trend. We are shedding government jobs so we can't exactly count on those to boost corporate profits.

Stagflationary Mark said...

When I said "yes it does" I meant that you are right about the graph showing a pronounced upward trend line over the long-term.

getyourselfconnected said...

Wages are not going up anytime soon, but the input price pressures built up months before will eat into profits going forward for a while.

watchtower said...

Great discussion, this helps me to understand a bit more.

Stagflationary Mark said...

Here's the problem with fat corporate profits.

If they are sustainable then more competition will appear to eat those profits. That's how capitalism works.

For example, if you see people making money hand over fist flipping real estate then you might be tempted to join them.

September 9, 2007
Real Estate Crash Flips 'Flipping Out'

Stagflationary Mark said...

Oops. I transposed numbers. That's September 7, 2009.

Jazzbumpa said...

Here's the problem with fat corporate profits.

If they are sustainable then more competition will appear to eat those profits. That's how capitalism works.


Ahh. But we do not have capitalism. We have corporatism. Corporatists hate competition. Why do you think there have been so many M&A's in recent decades? They almost never achieve their stated goals of synergies, improved efficiencies, blah-blah-blah.

What they do is eliminate competition and make incumbent firms to big to compete with.

They also eliminate jobs.

Further, other formerly high paying jobs have been sent across the word to people who will do them for cheap. As has been pointed out, this is not sustainable without a significant decline in U.S standard of living.

Jerry has the right idea, but rather than an either-or, I would do both: tax all revenue, regardless of where it is generated, and increase tariffs. China and India both have high tariffs.

Plus, since corporations are now people, they should pay taxes like people, on gross income, not profits.

Excellent post, Mark. Thanx!

Cheers!
JzB

Stagflationary Mark said...

JzB,

We have corporatism. Corporatists hate competition.

There is still competition when the McDonald's of the world go up against the Wendy's of the world though.

It is Beyond Thunderdome. Two corps enter, one corp leaves! ;)

5 year chart: McDonald's Stock vs. Wendy's Stock

Stagflationary Mark said...

Two corps enter, one corp leaves!

5 year chart: Apple's Stock vs. Nokia's Stock

February 9, 2011
Nokia at crisis point, warns new boss Stephen Elop

Stephen Elop describes the company as standing on a "burning platform" surrounded by innovative competitors who are grabbing its market share.

Hindsight shows that would have been an excellent time to short Nokia by the way. It is down 40% since he said that.

Walker said...

These are percentages. Wonder what the actual profit numbers are today compared to 2006, for example.

Walker said...

I'm curious about the phenomena of corporate profits seeming to rise in a recession. I am looking for an explanation for it.

Thinking about my own business... When the recession began to hit, first we got efficient. No material stockpiling, everything on demand. Cut everywhere we could think. Turned off lights. Looked for lower prices on everything.

That gave a bit of relief.

Then the recession deepened and when our markets started disappearing, we cancelled plans for expansion (in part cutting out vendors), lowered spending on offices, examined our advertising. Cut out spending that seemed marginal. Focused only on good markets.

Then the owners (me) cut our own salaries and put more savings into the business looking for new markets and new efficiencies.

Then we cut parttime workers, asking fulltimers to do more.

Then we cut services to give remaining staff a break.

Then we cut fulltime people.

Now we are in survival mode. Wondering if all the last cuts to the bone will actually make us show a profit increase, while, in reality, we are in the tank.

Just a thought.

I think a percentage increase in profits won't result in hiring, because the increase is a false measure of success.

Stagflationary Mark said...

Walker,

Thanks for sharing what you did to survive.

Wonder what the actual profit numbers are today compared to 2006, for example.

Here's a chart.

I think a percentage increase in profits won't result in hiring, because the increase is a false measure of success.

I think you are right. Further, if you were to undo the steps you took to survive then your profits would fall.

In a way, it is what I have done personally to survive our new economy. As the interest earned on my nest egg fell, I too turned to cost cutting.

Exponential growth in cost cutting is impossible to maintain. There is a limit to how much can be done. Those extrapolating it out like they would with true exponential growth will be very disappointed.

Walker said...

Mark,

Why are there record corporate profits?

There is no money out there. There aren't any consumers out there. Who is buying corporate goods and services? It doesn't make sense.

Is this bubble related to government infusion of money or bailouts?

Are there a handful of corporations with some extraordinary situations skewing these numbers?

As I said before, cut-or-die cost cutting could result in profits, compared to a rotten previous year, but I now see from your numbers it can't account for the increases you showed me in that link.

I think you are right. Further, if you were to undo the steps you took to survive then your profits would fall.

I imagine most small corporations have depleted their safety nets and most owners are thinking about mortgaging their homes to hold on. If we undid our cuts to staff, it isn't that profit would fall (because there isn't any), but that our cost would instantly become unsustainable.

Jumping to another thought: I would say that higher taxes on corporate profits is laughable, since no small business I know of is going to have to pay taxes.... except that you show corporate profits rising. Not to sound mystical or anything, but my business is nationwide... I can feel the vibe. Feel the movement. There isn't any movement. Market is dead still.

I go back to my original question about record corporate profits: How can this be? Short of outright fraud in these numbers, what accounts for these profits in a market (even a world market) that is ice cold?

Stagflationary Mark said...

Walker,

I go back to my original question about record corporate profits: How can this be? Short of outright fraud in these numbers, what accounts for these profits in a market (even a world market) that is ice cold?

I wish I could tell you the answer to that.

Here's my guess.

Let's say you are making a 3% profit and you sense that your revenues going forward are going to stay flat. You decide to brace for the worst.

If you cut your costs by 3% then your profits could jump to 6%, all things being equal. Any cost cutting goes directly to the bottom line.

One way you could cut costs is to simply stop trying to expand.

Just a thought. Don't know if it has any merit.

Walker said...

Well is the market ice cold do you think, Mark?

Stagflationary Mark said...

Walker,

The market has been on ice for a decade. I expect more of the same. Sigh.

Walker said...

Crap.