Tuesday, November 23, 2010

Real Corporate Profits Back to Pre-Recession Levels

U.S. corporate profits reached a new record high in the third quarter of $1.221 trillion (at an annual rate), after taxes and adjustments for inventory valuation and capital consumption (see graph above, data here), according to today's BEA report.  Compared to the second quarter, corporate profits increased by $12.6 billion during the summer months, and that makes seven straight quarterly gains in profits going back to the first quarter of 2009.  From the cyclical bottom of $774 billion of profits in the fourth quarter of 2008, profits for U.S. companies have rebounded by 57.6%, and by $446.5 billion.

Adjusted for inflation (using the Business Sector Deflator), real corporate profits in the third quarter were just slightly below the all-time record high of $1.229 trillion in third quarter of 2006 (see red line in graph above). 

See related NY Times report here.

12 Comments:

At 11/23/2010 10:13 AM, Blogger morganovich said...

only if we accept the CPI number.

if CPI is really 4-8%as folks like walmart, john williams, volcker, and bill gross claim, then we are not even half way recovered in real terms and are just mistaking inflation for growth.

 
At 11/23/2010 10:28 AM, Blogger Mark J. Perry said...

Adjustment for inflation was calculated using the Implicit Price Deflator for the Business Sector, not the CPI.

 
At 11/23/2010 11:16 AM, Blogger morganovich said...

i suspect you used CPI to get the implicit price deflation.

gdp deflator = (nominal GDP/real GDP) X 100

how can you get the denominator without CPI? BLS reported real GDP is calculated using their CPI.

did you calculate your own real GDP somehow? what did you use as a measure of price level?

if you just took their IPD, then CPI was built in.

 
At 11/23/2010 11:31 AM, Blogger ntk said...

I'm surprised that profits did so badly in the late 1990s.

 
At 11/23/2010 11:46 AM, Blogger Buddy R Pacifico said...

From The Bureau of Economic Analysis release cited:

"Current-production cash flow (net cash flow with inventory
valuation adjustment) -- the internal funds available to corporations for investment -- decreased $57.8
billion in the third quarter, in contrast to an increase of $61.1 billion in the second."


Corporate profits up very nicely but cash flow down dramatically. A lot of investors look for good cash flow when analysing stocks for investments. Is this dramatic drop in cash flow worrisome when profits are up?

I don't think so, because corporations are confident that cash can be deployed for growth now. Increases in cash may mean some companies won't be growing in the near future because they don't have high-yield strategies for cash deployment.

Good profits, less cash is optitmistic at this point in recovery.

 
At 11/23/2010 11:48 AM, Blogger morganovich said...

ntk-

the late 90's were dominated by the "market share grab" menatility.

if you think back, toward the top of the bubble investors were actually berating management teams that made a profit and accusing them of not reinvesting in the business and not growing topline fast enough/grabbing enough share.

that was what drove low profits.

 
At 11/23/2010 2:52 PM, Blogger rufus said...

What Taxes?

 
At 11/23/2010 3:11 PM, Blogger VangelV said...

Sorry Mark but the accounting assumptions can make even losses seem like profits. The financial sector is showing gains while it is still sitting on massive losses, which cannot simply be offset by passing them on to the Fed.

 
At 11/23/2010 5:21 PM, Blogger juandos said...

"The financial sector is showing gains while it is still sitting on massive losses, which cannot simply be offset by passing them on to the Fed"...

Speaking of the Fed, did anyone else catch this nugget from the always questionable AP?

Fed lowers outlook for economy through 2011

The story's funny line IMHO: "The Fed is slightly more optimistic about 2012, in part because officials expect the bond-buying program to have a positive impact. The economy should grow 3.6 percent to 4.5 percent that year, a tick better than June's forecast of 3.5 percent to 4.5 percent"...

 
At 11/23/2010 7:09 PM, Blogger PeakTrader said...

National Economic Trends (Nov 2010) by the Federal Reserve Bank of St Louis shows on page 21 that Corporate Profits are about 13% of GDP, which is near the high in 2006.

 
At 11/23/2010 7:23 PM, Blogger PeakTrader said...

NTK: "I'm surprised that profits did so badly in the late 1990s."

In the late 1990s revenues were important (particularly in emerging firms). After the Creative-Destruction process, profits went way up.

 
At 11/24/2010 5:08 PM, Blogger juandos said...

Serious question for you PT, you note as did I the following: "National Economic Trends (Nov 2010) by the Federal Reserve Bank of St Louis shows on page 21 that Corporate Profits are about 13% of GDP, which is near the high in 2006"...

O.K. let's take the Fed at their word and the profits are up by 13% but is that a monetary amount in 2006 dollars or a monetary amount in 2010/2011 dollars of 'questionalable value'?

 

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