The trend in US corporate profits is what you think it is
by Rebecca Wilder
The trend in US corporate profits is what you think it is
In my research for an article about the cross section of national income, I ran across this piece in Forbes by Tim Worstall. In this article, he uses proprietary Bloomberg and WSJ data for 2012 corporate offshore cash holdings to assess that corporate profits abroad are driving a reasonable share of the increase in the BEA’s measure of corporate profits: (see my post from Monday, or Ed Dolan’s post from June):
“there’s a simple enough explanation for at least part of it: simply globalisation.
Now what is it that we know about American companies and their profits? Something that has rather changed over the past decade or so? Yes, that’s right, we’re in a huge period of globalisation. So much so that US companies are now making very large profits outside the US economy. Apple AAPL -1.58% is making phones (or having made for it) in China and selling them in Europe. This isn’t, in any real sense, part of the US economy. The same goes for Google GOOG -1.53%, Microsoft MSFT -11.37% and however many other companies you want to study. Profits are being made offshore, out there in the global economy.”
But this is just wrong. According to the Bureau of Economic Analysis (see Table 12 of the BEA Q1 2013 release), aggregate corporate “rest of the world” profits – i.e., large US corporations with earnings abroad – declined $8.9 billion in 2012.
The surge in 2012 corporate profits occurred on account of domestic corporate profits rising 10% to $1.5 trillion in 2012.
True, corporations have gone global but that does not explain the surge in corporate profits since the end of the financial crisis. The surge has been home grown.
So yes: the trend in US corporate profits is what you think it is.
crossposted with Economonitors The Wilder View
Hi Rebecca:
So Tim believe we are overseas taking advantage of the lack of Overhead to operate in those countries coupled with a slightly lower Labor as defined in the Cost of Manufacturing and as you deftly point out, the BEA says differently on corporate profits?
Perhaps we have enjoyed a better business economy with lower interest rates and easy money?
It’s the cashflow impact of not paying taxes. They record the tax as an expense, so don’t report profits, but they keep the cash on their balance sheet since they haven’t paid it.
It shouldn’t explain the entire amount, but it explains part of it. Taxes due in another jurisdiction (perhaps the US) that are simply not paid.
Wouldn’t rapidly increasing depreciation decrease the apparent profitability for businesses or, conversely, rapidly decreasing depreciation increase the apparent profitability. If the firms were investing heavily overseas or if assets were only now coming on stream so they could be depreciated, then the apparent profitability would be suppressed. Likewise, if these global firms had slashed investment in the US, then depreciation would be tumbling, increasing the apparent profitability. Given the seeming lack of investment in capacity in the US as seen in the pathetic jobs numbers, one would have to imagine we’ve been witnessing the result of the transfer of corporate capacity off-shore, with the resulting effect on domestic profitabilty due to the supernova effect as the depreciation offsets disappear.
The graph in the post is good. We can see that domestic profits are lower after the crisis but rising. Likewise, Foreign profits are higher but falling. There are diminishing returns in other parts of the world.
Many, including me, see a return of investment to the US in the second half of 2013. Profits are rising here. Costs have been lowered. Inflation is low. Credit is easy for corporations.
We are near the end of a business expansion where business looks good.
The US economy will start to make a comeback in spurts still constrained by demand. It will be interesting to watch this play out.