Click to enlarge.
This chart shows corporate profits before tax (as seen on line 12 of table F.7 Distribution of National Income of the Fed's Flow of Funds Accounts report released today) adjusted for both inflation and population.
I would argue that these profits are not sustainable long-term.
June 9, 2011
Pimco's El-Erian: Seeing Global Growth Slowdown Now -CNBC
Pacific Investment Management Co. Chief Executive Mohamed El-Erian Thursday said he was worried by recent economic data on both the domestic and global level and doesn't see how corporate profit growth can be sustained within this environment.
I don't see how it can be sustained within any environment. At the very least, fat profits such as these inspire more competition (and more competition eventually leads to lower profits).
Update:
This post has a followup and some of my opinions have been altered. Please see Corporate Profits vs. Dollar Index.
Source Data:
FRB: Flow of Funds Accounts
St. Louis Fed: Population
St. Louis Fed: CPI-U
I would argue that these profits are obscene.
ReplyDeleteThe typical family of 4 is currently generating $24,000 in corporate profits per year with unemployment at 9.1%.
ReplyDelete"Obscene" would seem to be an understatement. Sigh.
It would be interesting to see that on a log scale with trendlines.
ReplyDeleteThere was a doubling of corporate profits from 1950s to late 1970s, and we got the 70s inflationary adjustment (plus some nasty recessions, and the rest of the '70s).
I think on a log scale the 1980-2011 period will look rather similar.
BTW, I disagree about high profits inviting competition that tends to reduce the profits. That's only true in a world where antitrust law is enforced. In other worlds, such as that of the British East India Company, monopolistic profit extraction contributes to revolutions and other forms of social upheaval...
Mark -
ReplyDeleteTo complete the X-reference, here's mine. You have pre-tax profits, I have after. You have per cap, I don't. Yours is inflation adjusted, mine isn't.
Even inflation and population adjusted, it looks like a log scale is appropriate. That's nuts!
I agree with Wisdom Seeker.
We are on a road to either So American Banana Republicanism or 12th century feudalism. Unless there is literally blood in the streets. But I see 0.000 chance of that happening here. What populism we have is right-wing. Tea-baggers welcome our new corporate overlords, mistaking that for freedom.
Finance companies are too big to fail. Industrial companies are too big to compete with.
The only entities that can level the playing field are government and unions. But corps own govt, and unions have steadily lost power - coincidentally, since about 1980 - and now can do nothing.
Profit extraction truly is obscene and ruinous.
The other way for non-sustainability to manifest itself is in total economic collapse. Then the end result is not the 12th century but the 5th.
I see no reason for optimism in any direction.
Cheers! (kinda, sorta)
JzB
Wisdom Seeker and Jazzbumpa,
ReplyDeleteA log scale could be appropriate. I'm trying to show that it might not be.
It is already adjusted for population and inflation. Without exponential real wage growth (which we are definitely not seeing lately), then I would argue that there won't be exponential real profit growth either.
In other words, it is my opinion that these are simply profit bubbles and are not sustainable.
As seen in the chart there was $2,000 of real pre-tax profits in the 1950s and there was also about that thirty years later in the 1980s. Who is to say that we won't have $2,000 in the 2010s? Or at the very least something approaching that level. We did make it to $3,000 recently and unless you think the problems are completely behind us then we are at serious risk of doing it again.
Wisdom Seeker,
ReplyDeleteBTW, I disagree about high profits inviting competition that tends to reduce the profits. That's only true in a world where antitrust law is enforced.
We'll have to agree to disagree on this.
For years I thought Microsoft would be proof of your comment, but now Apple is starting to look like the monopoly.
I would also point out that the global economy makes it very difficult for true monopolies to form.
Air France jet mega-order split betwen Airbus and Boeing
Among its current fleet, Air France-KLM has 73 Boeing planes against 35 Airbus carriers.
And lastly, this profits before tax chart is made up of domestic nonfinancial, farm, rest of the world, and domestic financial.
It is the "rest of the world" profits that have shown the highest growth (by percentage) in recent years. This would make sense if you think the falling dollar is driving much of the profit growth.
Trade Weighted Exchange Index: Major Currencies (DTWEXM)
Note how the chart I offered compares to this one (inversely). I think there is a relationship here.
I also think this is at least partially driving the desire to put a log scale on the chart I offered.
Perhaps we will see an exponentially falling dollar. I would argue that if the price of oil is any indicator, it won't help our prosperity though.
This has been a great discussion.
ReplyDeleteVery thought inspiring.
I'm about to post a new chart that uses the dollar index to explain some of this behavior. It has altered my opinion and formed new ones.
Hi Mark -
ReplyDeleteOn the agreeing to disagree front, I agree. But let me agreeably disagree a bit more!
I wrote "BTW, I disagree about high profits inviting competition that tends to reduce the profits. That's only true in a world where antitrust law is enforced."
And you replied: "We'll have to agree to disagree on this. For years I thought Microsoft would be proof of your comment, but now Apple is starting to look like the monopoly. I would also point out that the global economy makes it very difficult for true monopolies to form."
Let me say that I do understand that high profits do invite disruptive technologies to break existing monopolies. I just think that the monopolists have been winning in too many industries, particularly telecommunications and mass media, where healthy competition is a major issue for healthy democracy, and wanted to point out that they have defenses...
For the specific case of Apple, my disagreement would be that Apple is a monopoly IN A DIFFERENT PART OF THE TECH SPACE than Microsoft. Apple never succeeded in breaking Microsoft's desktop monopolies in terms of OS or Office apps. It succeeded by growing new business spaces to monopolize on its own. I'm not sure Apple will maintain its grip the way Microsoft has -- I don't see that they've got a moat after Jobs is gone -- but I don't think that two monopolies is better than one!
Meanwhile, for the second part, I don't see how global competition prevents true monopolies. I can see how opening up global competition temporarily increases competition, but in the absence of meaningful antitrust enforcement (and in the presence of ridiculous intellectual property / copyright protection law, such as Mickey Mouse still being protected), the wider competitive sphere only delays the inevitable consolidation, doesn't it? Except for those industries which are so defense-related that nations refuse to give them up and therefore subsidize them?? I worry that globalization just makes the emerging monopolies much larger, making it very difficult for individual governments' antitrust enforcers to do their jobs...
Wisdom Seeker,
ReplyDeleteI do think there are monopolies but I think that they are the exception and not the rule (at least so far).
There are 500 companies in the S&P 500 and each of them compete with all the others.
Just look at what we really spend our money on.
There are TVs. I have SO many choices I barely know where to start.
There are cars. Once again, I have many choices.
There are homes. There are many, many different home builders.
There is food. The bread aisle is amazing. Wonder Bread could not survive the sheer number of competitors.
Cable is a near monopoly though. I will grant you that and I'm not all that happy about it.
That said, Suave shampoo is the price it is because there are SO many shampoo choices. They just don't have all that much pricing power.
One more thought.
ReplyDelete...the wider competitive sphere only delays the inevitable consolidation, doesn't it?
Perhaps, but probably not for many lifetimes.
Two of my best investments in my life were based on the new guy winning over the old monopoly.
The first was Wizards of the Coast. They made a fantasy card game. They joked early on that they would buy TSR (the Dungeons and Dragons company) for cash someday. TSR was the fantasy company with the supposed moat. It wasn't good enough though. Wizards did eventually buy TSR for cash. No joke. I suspect much of it was just for the glory of doing so. It didn't hurt that the success of Wizards was coming at the expense of TSR.
The second was Hansen. Red Bull was the supposed monopoly and yet Hansen introduced the Monster Energy drink and competed extremely effectively. Had I continued to hold Hansen stock until today I would have made over 100 times what I paid for it. (I actually made 6x).
There will always be innovation and the little guy will therefore always have a chance.
Then there was my place of employment. We were bought up by another company but I can tell you first hand that our innovation was slipping when they did. They did not get their money's worth. I left like a rat from a sinking ship.
My Layoff Fallout Clock
Big companies move like big government. Too slow and too late.
Granted, big companies will often buy the little companies at some point. Hasbro bought Wizards of the Coast for cash. It is not without its risks though. Buying what once worked is not necessarily a winning strategy long-term.
Just opinions of course!