Saturday, August 28, 2010

Record-High Corporate Profits in QII: The Mother's Milk of Stocks, Business Success and Job Creation

The chart above shows quarterly "Corporate Profits After Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment" (BEA data here) from 1990 to 2010 (inspired by Scott Grannis's recent post).  The red line represents profits in nominal dollars (billions) and the blue line represents inflation-adjusted profits using the Business Sector: Implicit Price Deflator (data here).  Comments:

1. Nominal corporate profits in the second quarter reached almost $1.2 trillion, which is an all-time record high, and 54.5% above the recent bottom of $774.6 billion in the fourth quarter of 2008.  

2. Nominal corporate profits have now doubled in less than ten years,  from $600 billion at the end of 2001 to the current level of $1.2 trillion.  The S&P 500 Index is actually lower now (1047) than at the end of 2001 (1148).   

3. Quarterly profits have been growing at an average annual rate of 30% over the last six quarters, which would suggest that the equity market is extremely undervalued (see Scott Grannis' comments here). 

4. On an inflation-adjusted basis, real corporate profits are slightly below the $1.2 trillion record in 2006, but 53% above the QIV bottom.  

5. For either measure of corporate profits, it's clear that there has been a complete V-shaped recovery from the 2007-2009 recession, and the record-high profits would be completely inconsistent  with any chance of a double-dip recession. 

6. Larry Kudlow has frequently reminded us that corporate profits are the "mother’s milk of stocks, business success, and job creation."  In that case, the record-high profits of American companies suggests that the U.S. economy is doing better than the "economic hypochondriacs" keep telling us, and we could be poised for an economic boom for stocks, businesses and job creation. 

43 Comments:

At 8/28/2010 7:34 AM, Blogger bob wright said...

Mark,

1. How are profits adjusted for Inventory Valuation Adjustment and Capital Consumption Adjustment?

2. What companies does BEA look at? That is, are these S&P 500 profits? Are these the profits of a sample of companies? Does this include small businesses like mine?

I'm trying to understand what the BEA is measuring and how this measurement is then adjusted.

Thanks.

 
At 8/28/2010 7:37 AM, Blogger Mark J. Perry said...

Bob: I'm not exactly sure about the methodology, but I can check into it. Mark

 
At 8/28/2010 7:55 AM, Blogger rufus said...

Well, yeah, they no longer have to pay taxes.

EX: Exxon - 2009 Profits $39 Billion. U.S. Income Taxes - Zero.

 
At 8/28/2010 8:13 AM, Blogger bob wright said...

Mark,
Thanks.
I clicked the Notes link on the BEA page but didn't see an explanation of the data set. Just wondering if you might have a link to the details.

Rufus,
Do you have a link to Exxon's 2009 tax return?
Where did you get your info?

 
At 8/28/2010 8:18 AM, Blogger rufus said...

It was an article everal months ago in, I think, Reuters.

 
At 8/28/2010 8:31 AM, Blogger bob wright said...

Rufus,
How many times should corporate profits be taxed?

 
At 8/28/2010 8:38 AM, Blogger rufus said...

But, Bob, anecdotes aside, all you really have to do is go here:

Treasury Statement - July

and see that the Gov has collected All of $139 B of Income Taxes from Corporations through the first 10 months of the year, and expect to collect $180 B for the year, total.

That would be $180/$4,800 = 0.0375 or 3.75%.

 
At 8/28/2010 8:44 AM, Blogger bob wright said...

But, how many times should corporate profits be taxed?

 
At 8/28/2010 8:50 AM, Blogger rufus said...

Well, Bob, let me turn it around; is 3.75% enough?

 
At 8/28/2010 8:55 AM, Blogger PeakTrader said...

In the late 1990s, it was about growth; top line revenue, gaining market share, technological advances, etc. Real wages increased substantially and we were beyond full employment.

Over much of the 2000s, labor and capital excesses were reduced, leading to a record 20 consecutive quarters of double-digit profit growth.

Now, it's about cutting costs. Real wages and employment are depressed (there's an inverse relationship between wages and profits).

 
At 8/28/2010 9:10 AM, Blogger juandos said...

I note that rufus's link wasn't even remotely connected to bob wright's question...

rufus's question: "Well, Bob, let me turn it around; is 3.75% enough?"...

Any is to much since Exxon and others will pass the costs of taxes onto the consumer in the bottom line price of their products and services...

From the always questionable ABC News: GE, Exxon Paid No U.S. Income Taxes in '09

Meanwhile in the real world we have this from a Forbes blog: And for all you commenters outraged that Exxon isn’t paying taxes in the U.S., don’t worry, it is. Our article only focused on income taxes, but it’s worth noting that the 10-k also records $7.7 billion in other taxes in the U.S. (like sales taxes) and more than $50 billion of other taxes and duties paid (I mean recorded) overseas...

 
At 8/28/2010 9:14 AM, Blogger bob wright said...

"enough"

That's a very nebulous term.

Every person will have their own opinion of what's "enough" - or "fair." Bottom line - it's one's opinion and it's just an opinion.

It is my opinion that corporate profits should only be taxed when they are paid out as dividends.

Retained profits [earnings] should not be taxed. They should be left for R&D and investment. Raising the cost of R&D and investment results in less R&D and investment.

Intel CEO Paul Otellini:

"Our combined state and federal corporate income tax rate"—about 38%—"is the second highest in the industrial world. It is precisely these high statutory corporate rates that punish the most dynamic and innovative firms and hinders their ability to compete globally," Mr. Otellini said. "I can tell you that it costs $1 billion more to build, equip and operate a semiconductor manufacturing facility in the U.S. Ninety percent of the cost difference is the result of tax and incentive policies. With such policies, are we surprised that companies are investing overseas?"

read the full article here


So.

1. How many times should corporate profits be taxed?
2. Does price matter?

 
At 8/28/2010 9:25 AM, Blogger rufus said...

Bob, I don't care if you tax them one time, zero times, or a hundred times. I don't care if the tax rate is 1%, or 50%.

I just get tired of people pissing down my back, and cooing in my ear about "how warm the rain is."

The Intel phony whines about 38% when our own Treasury Dept acknowledges collecting 3.75%.

The poorest man in America has at least 26.5% taken from his check.

The wealthiest man in America is paying 15% (tax on dividends) + 3.75% Income tax on Corporations for a Grand Total of 18.75%.

Perhaps you feel that's a good deal. Don't be surprised, though, when the majority of voters don't agree with you.

 
At 8/28/2010 9:31 AM, Blogger rufus said...

Well, that's Great News, Juandos. I'll just inform the IRS that I won't be paying any Income Taxes this year inasmuch as I paid a good bit of "sales" taxes to the State of Mississippi.

I'm sure that'll work; don't you think?

 
At 8/28/2010 9:33 AM, Blogger rufus said...

And, btw, Juandos, when I go down to the corner, and buy gasoline, and a coke, I'm pretty sure that's ME, the customer, paying those sales taxes, and road use taxes, not Exxon.

 
At 8/28/2010 9:36 AM, Blogger bob wright said...

What does the majority think?

Apparently, if I get enough voters to agree with me that "fair" means taking most of your money and none of "ours", that's fair.

"fair" means whatever the majority of people happen to "think" it means at any given point in time.

Is it fair that half of the people in the U.S. pay zero federal income tax?

They are pissing on my back and telling me it's fair.

 
At 8/28/2010 9:41 AM, Blogger juandos said...

"Well, that's Great News, Juandos. I'll just inform the IRS that I won't be paying any Income Taxes this year inasmuch as I paid a good bit of "sales" taxes to the State of Mississippi"...

Oh please do, I would love to hear their response to your statement...

"And, btw, Juandos, when I go down to the corner, and buy gasoline, and a coke, I'm pretty sure that's ME, the customer, paying those sales taxes, and road use taxes, not Exxon"...

Yes I know and said as much in my previous comment...

Didn't it make any sense to you?

BTW how much tax is to much tax especially considering how much of its wasted pandering to the parasites?

From the TaxProf blog: Obama Tax Policies Threaten Gulf Recovery From Katrina and BP

 
At 8/28/2010 9:43 AM, Blogger rufus said...

Is it fair that those people you reference are forced to put 13.4% of their gross pay in 2% "special" U.S. Social Security Bonds for 50 Years, and then have to listen to an overwhelming cacophony of Caterwauling from the "Conservatives" when, during a recession, the SS Trust fund might have to cash in a few dollars of their "Special U.S. Bonds?"

On one hand you want to claim soc sec taxes aren't really taxes, and then on the other hand, you want to claim they are.

 
At 8/28/2010 9:53 AM, Blogger Buddy R Pacifico said...

The U.S. corporation should be making even more profit by lowering the corp. tax rate. The U.S. rate is among the highest in the world. Much of the profit is generated by foreign operations and the cash is left in those countries.

Most countries have a much lower corp. tax but impose a Value Added Tax (VAT) instead as a tax revenue stream. U.S. produced goods and services have an automatic disadvantage on the world market because they include much higher taxes.

VAT/Sales Tax is rebated at the border as a Border Adjusted Tax (BAT). The biggest boost to U.S. jobs is lowering considerably the corp. tax rate and incorporating a VAT.

 
At 8/28/2010 9:59 AM, Blogger PeakTrader said...

Do Corporations Really Pay No Taxes?
August 20, 2008

Many businesses we regard as successful operate on small profit margins. After paying $5.8 billion in taxes in 2005, Wal-Mart earned $11.7 billion—a nice chunk of change. But those earnings were on revenues of $312 billion, a mere 3.4 percent net profit margin.

Exxon Mobil earned $36 billion in 2005 after paying $23.3 billion in taxes on revenues of $371 billion. Looking at that result you realize that in America today, a ‘windfall’ profit is one that amounts to less than 10 percent of revenues.

American businesses actually produced 31 million new jobs in 2005, driven by on average some 1.5 million firms every quarter that were expanding, and another 370,000 new businesses that were starting up. On the other hand, firms also eliminated nearly 29 million jobs, including an average of nearly 1.5 million businesses that were contracting each quarter and another 325,000 going out of business, according to the Bureau of Labor Statistics’ Business Employment Dynamics survey. The net result, 2 million additional jobs, is the product of the enormous creation and destruction going on below the surface.

The BLS’ Business Dynamics Survey, for instance, shows that in 2005 there were 7.3 businesses that were contracting for every 7.6 that were expanding, including 1.3 that were closing their doors for every 1.5 that were starting up.

Large businesses were hardly immune to this kind of tumult. For every 5.8 jobs added by firms with more than 500 employees, other firms that big eliminated 4.9 jobs.

Those startling numbers should remind us that even in a strong economy there are plenty of losers—not just winners.

 
At 8/28/2010 10:08 AM, Blogger juandos said...

"The wealthiest man in America is paying 15% (tax on dividends) + 3.75% Income tax on Corporations for a Grand Total of 18.75%"...

Hmmm, how many 'poor people' hand out jobs with paychecks to other people?

If the wealthy are going to be punished for being successful (via excessive taxation) then who will do the investing that finances places of industry and services?

Guess Who Really Pays the Taxes

rufus what's your rationale of why a 'rich' person should pay one more penny in taxes than a poor person?

From the CBO: The federal tax system is progressive—that is, average tax rates generally rise with income. Households in the bottom fifth of the income distribution paid 4.0 percent of their income in federal taxes, the middle quintile paid 14.3 percent, and the highest quintile paid 25.1 percent. Average rates continued to rise within the top quintile: The top 1 percent faced an average rate of 29.5 percent...

 
At 8/28/2010 10:30 AM, Blogger rufus said...

Well, the fact is, Peak Trader, that Dr. Perry tells us that Corporations are Earning at a rate of $4.8 Trillion, this year, and the Treasury tells us they will pay $180 B in Income Taxes,

Which means they're paying 3.75% of "Earnings" in Income Taxes.

And, Juandos, that 4.0% for the bottom Quintile Did Not include Social Security Taxes, . . . . er, "contributions." Add them in, and that bottom quintile is paying just about the same percentage as a Super Wealthy 1/10th of 1% that is living off Dividends.

Look folks, we have, traditionally, required about 22% of GDP to keep the ship afloat. We normally get a little less than 20% in taxes, and borrow the other 2%.

If you think you can "float the boat" with 3.75% from Corporations? Well, Good Luck.

I think you'll need it.

 
At 8/28/2010 10:34 AM, Blogger juandos said...

"And, Juandos, that 4.0% for the bottom Quintile Did Not include Social Security Taxes, . . . . er, "contributions." Add them in, and that bottom quintile is paying just about the same percentage as a Super Wealthy 1/10th of 1% that is living off Dividends"...

So rufus financing the socialist nanny state is excessivly expensive, what's new with that?

"If you think you can "float the boat" with 3.75% from Corporations?"...

Maybe we could but that would mean that politcos could no longer buy votes (nanny state programs) with extorted tax dollars...

 
At 8/28/2010 10:36 AM, Blogger rufus said...

Juandos, you asked,

rufus what's your rationale of why a 'rich' person should pay one more penny in taxes than a poor person?

Well, Juandos, that's real simple; they're the only ones that can afford it.

If you want the Greatest Military the world has ever imagined, much less seen, and you want Interstate Highway Systems, and you want the Great Universities, and Hospitals, then it's real simple, the ones with the most money are going to have to pony up the most.

Or, you can vote to be "Mexico."

Your call.

 
At 8/28/2010 10:39 AM, Blogger rufus said...

After all, Mexico only collects "9%" in Federal Taxes.

 
At 8/28/2010 10:44 AM, Blogger juandos said...

"Well, Juandos, that's real simple; they're the only ones that can afford it"...

So you think extorting from the sucessful is a way to finance YOUR idea of government, eh rufus?

"If you want the Greatest Military the world has ever imagined, much less seen, and you want Interstate Highway Systems, and you want the Great Universities, and Hospitals"...

Hmmm, what part of the Constitution mandates federal interference in health market place or the educational market place?

The fact that you seemingly refuse to understand that most of the tax dollars extorted from the productive go towards financing the 'nanny state' that is at best constitutionally questionable is the real problem here...

 
At 8/28/2010 10:49 AM, Blogger PeakTrader said...

Rufus, there's a big difference between sales and earnings.

Also, corporate taxes look small, because losers recoup their taxes:

"A corporation that realizes a negative income, or income loss, has the option to offset previous periods of profitability and carry back the loss. This carryback can be claimed for as much as three previous periods.

For example, suppose a company is profitable in years one and two but loses money in year three. Year three’s losses can be carried back and the corporation can re-file its taxes and get a refund from the government on taxes paid in the previous periods.

When the three allowed past periods are used up, the corporation may carry forward losses to periods in the future for up to fifteen years. This carryforward can be applied to future positive income when the losses exceed the three previous year’s profits."

 
At 8/28/2010 11:26 AM, Blogger rufus said...

Fine, Juandos, maybe, if you guys get enough support, we'll become "Mexico." I've always loved the food, and the gals are cute. It's best you keep me away from the tequila, though. :)


Okay, Peak Trader, let's us take a little ride in the way-back machine.

Treas Statement Sept 2005

It looks like Corpations paid $265 Billion in 2005. I don't have the number of Corporate Profits for that year; let's guesstimate $3.8 Trillion. Sound fair enough?

That would be 6.9%. Hmm. Not ezzackly "settin the world on fire," then, either; were they?

The fact is, the whole 38% thing is a Canard. You couldn't sell it to a group of third graders.

Look, if you don't want to tax Saudi Princes that live off their dividends from Exxon (which makes a large amount of its profit in the U.S. - but, manages to work the accounting so the profit disappears, here, and reappears in a subsidiary headquartered in a tax haven) well, then,

those Saudi Princes "bless" you.

Me, I think you're suckers.

 
At 8/28/2010 11:39 AM, Blogger Mark J. Perry said...

Rufus: It's NOT $4.8 trillion for the year, it would only be $1.2 trillion at a seasonally adjusted ANNUAL rate. It was actually only $300 billion of corporate profits in QII, which the BEA multiplied by 4 to arrive at $1.2 trillion.

 
At 8/28/2010 11:43 AM, Blogger PeakTrader said...

Rufus, corporate profits have typically been less than 10% of GDP. In 2010, I suspect, it'll be less than $1.4 trillion.

Also, "the winners" pay a large percentage in corporate taxes, i.e. are punished, while "the losers" get their taxes back, i.e. are rewarded.

In 2005, 31 million jobs were created and 29 million jobs destroyed.

 
At 8/28/2010 11:58 AM, Blogger rufus said...

GACK!!!

Well, it still only comes out to 15%.

Not 38%.

So there. :)

Bedtime. G'nite.

 
At 8/28/2010 12:13 PM, Blogger PeakTrader said...

So, in 2005, U.S. GDP was $13 trillion, corporate profits are normally less than 10% of GDP, and corporate taxes were $265 billion.

Do, I hear 20%?

However, it looks like corporate profits were around 8% of GDP in 2005.

Do, I hear 25%?

Of course, corporations that lose money get their taxes back through carry-backs and carry-forwards.

Do, I hear 35%?

 
At 8/28/2010 1:00 PM, Blogger marmico said...

US corporations pay around 3.5% +- of taxes as a percentage of GDP.

Source: OECD Statistical Review

It is a middling effective tax rate in the OECD picture. If I hear another pinhead full of flatulence say that US corporate statutory tax rates must be reduced, I suggest that he packs up his bags and heads on over to Turkey where corporate taxes are cheap and the baklava is healthy.

US households and corporations pay less taxes as a percentage of GDP than all OECD countries except Turkey and Mexico. I suggest that juandos pick up his broom and fly to Mexico where the dope is cheap and the dopes are cheaper.

 
At 8/28/2010 1:20 PM, Blogger Buddy R Pacifico said...

marmico said...
US corporations pay around 3.5% +- of taxes as a percentage of GDP

The U.S. has the highest corporate tax rates in the first or second economic world. Examples:

U.S. 35%
Germany 26.37%
Chile 17%
China 25%
Netherlands 25%

U.S. corporations tend to leave a lot of cash in foreign affiliates because of U.S. taxation policies.

Goods and Services that are produced in the U.S. are at distinct disadvantage because of high corp. taxes and lack of a Value Added Tax.

Several bad outcomes result. U.S. Exports are greatly disadvantaed. Earnings from foreign affiliates don't come into the U.S. as capital. Millions of jobs are sacrificed because of the tax disadvatage for U.S. corporations.

Substantially lower the corp. tax rate and generate tax revenues through a VAT.

 
At 8/28/2010 1:34 PM, Blogger morganovich said...

rufus-

your facts on exxon are just plain wrong.

go read the 10k.

http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExOTMxMjUtMTAtMDQyOTI5L3htbC9zdWJkb2N1bWVudC8xL3BhZ2UvNjU%3d

2009 revs $301bn
sales based taxes: $26bn
other taxes and duties $35bn

leads to a pre income tax income
of $35bn on which they then paid $15bn in taxes.

so: their income tax rate is 42%.

prior to that they also paid about 20% of revenues in other taxes.

can you possibly think that is a low tax rate?

another way to look at is is profit before all taxes would be $81bn. net profit after taxes was $19.6 bn.

that's an effective tax rate of 76%.

you need to get your facts straight before you make such ludicrous assertions.

 
At 8/28/2010 1:43 PM, Blogger morganovich said...

i also have some very serious doubts about this BEA data. it simply does not pass the smell test.

consider:

let's be generous and call US GDP $15 trillion.

now let us also make the unrealistic assumption that q2 GDP is 25% of annual (it's actually less)

that would imply 3.75tn in GDP for Q2. roughly 25% of that is government spending. that leaves $2.8tn in private activity.

$1.2 tn in corporate profit for Q2 would mean that even if all private revenue in the US were corporate, profit margins would be 42%, an absurd number.

there is not an industry group in the US with margins that high. there is no way they are even 1/4 of that in aggregate.

there is something very, very wrong with this survey.

it simply cannot be true.

how can $11.25tn in annual GDP produce a run rate of $4.8 trillion in profit?

it can't. is it possible that these are annualized numbers and that the 1.2tn in profit is really 4X q2?

that would yield number than still looks too high, but at least would be within the realm of plausibility.

 
At 8/28/2010 3:11 PM, Blogger Benjamin said...

When Bush left office, the financial system was in collapse, the economy was contracting, and we were stuck in two wars.

Now, we have record corporate profits, a growing economy, and we are stuck in one war.

Not bad progress for Obama.

 
At 8/28/2010 3:13 PM, Blogger Benjamin said...

Bob Wright-
I will surprise you.
I think dividends should be tax-free. Maybe not interest payments though.
The idea would be to get people to buy stock, not lend.
Less leverage is good.

 
At 8/28/2010 8:31 PM, Blogger juandos said...

"Fine, Juandos, maybe, if you guys get enough support, we'll become "Mexico.""...

Well rufus thanks to this Congress and this clueless idiot in the Oval Office now we are well on our way to becoming another Mexico...

Simple, basic economics should tell you that...

"I suggest that juandos pick up his broom and fly to Mexico where the dope is cheap and the dopes are cheaper"...

Well I think socialists like marmico should put their money where their mouth is if they want to continue to finance the nanny state...

pseudo benny blathers on: "When Bush left office, the financial system was in collapse, the economy was contracting, and we were stuck in two wars"...

Where you asleep pseudo benny when Congress taken over by the neo-coms?

How's it working out now that Obama has been at the helm for more than a year and half?

Obama’s Economic Slide

Yeah pseudo benny you're on top of your game as usual...

Maybe a dose of Krauthammer will help you out: The Last Refuge of the Liberal

 
At 8/28/2010 9:19 PM, Blogger juandos said...

"When Bush left office, the financial system was in collapse, the economy was contracting, and we were stuck in two wars"...

What were you doing pseudo benny, watching a movie?

 
At 8/29/2010 7:43 AM, Blogger bob wright said...

Benjamin,
You do surprise me.
Hope doth spring eternal.

 
At 8/29/2010 8:56 AM, Blogger PeakTrader said...

Bush will never be rated a great president like FDR, who turned a depression into a double-dip depression and allowed a world war.

 
At 8/30/2010 8:43 AM, Blogger VangelV said...

But, how many times should corporate profits be taxed?

They should not be taxed at all. There is already a mechanism to tax profits that are distributed to shareholders.

 

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