Billions of dollars, seasonally adjusted, after tax without inventory valuation (IVA) and capital consumption adjustments (CCAdj).

fredgraph
Source: FRED

 

I have been trying to explain to some of my more Fed obsessed friends there are factors outside the central bank that matter also. One such factor is corporate profits.

As the chart from the Federal Reserve Bank of St. Louis shows, after tax Corporate Profits are at all time highs. And while the inclination is to say this is driven exclusively by programs like QE and ZIRP, the pre-crisis profit picture was also very rosy. (Rates were very low than also).

I am hard pressed to believe that corporate profits are due exclusively to ultra-low rates. There is no doubt that financing costs are lower, but that is offset by tightened credit. Demand for goods and services has been increasing only modestly. While private sector growth has been repsectable 3-4% — the public sector continues to be a net negative drag on growth. State and municpality layoffs also have the effect of depressing demand.

The corporate sector is actually well positioned: Balance sheets are the cleanest in a long while. Companies are running very efficiently, with limited head count (we see evidence of this in stubbornly high unemployment rates). Productivity gains are hard to come by because productivity has risen so much over the past 20 years. Business Intelligence software is allowing firms to make changes on the fly — it used to take several quarters before enough intel could be gathered to shift manufacturing or supply chain decisions. It now happens in real time.

~~~

Yes, the Fed is a factor in high corproate profits — but its not the only factor.

Category: Data Analysis, Earnings, Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

32 Responses to “Corporate Profits After Tax”

  1. jacobh says:

    True that is may be that corporate profits have fared well in the last few years. However, the value of a stock is derived from future (discounted) profits. And how well will those fare with the US Federal deficit shrinking (and with the deficit hawks yanking the wheel…) and the consumers still up to their eyeballs in debt?

    I don’t see a reason for sustained profit growth going forward, until austerity has been resolved.

    Obviously, the FRB is keeping the discount rates very low, so a higher P/E than normal should be expected, until the FRB withdraws the liquidity.

    • Question for you Jacob:

      Had you seen “a reason for sustained profit growth” since the 2009 lows?

      Our instincts frequently lead us astray

      • neddyj says:

        Barry – so if we hadn’t seen one in 2009, and the market went up 150%…now we see one, does that still mean the same thing?

        Also – I’ve seen you make this case before, and I’m only asking the question – isn’t a HUGE reason that we’ve seen the profit growth over the last 5 years because banks got bailed out and the accounting rules were changed so they no longer have to mark to market? I’ve never seen this explained once. If all these years have had such great profit growth, you have to acknowledge that the low base they came from was due to the bad loans that the banks made…now the loans haven’t gone away completely but since they no longer have to mark to market the profits have made a miraculous rebound. To me it’s either they haven’t grown as much as they seem to have grown because that low starting base was false (that’s if you think marking to market was the wrong thing to do…) OR you’re calling the accounting rule change ‘growth’.

        The other HUGE reason for the profit growth is no doubt Apple. And now their profit growth has stalled. Where does that lead us to in the next 5 years?

        Love your blog and your insights Barry, this is just a fact about this market that has bugged me.

      • The finance sector should have been through a full bankruptcy reorg. They were zeros, all of them.

        But the bail outs were 5 years ago. I am not sure how much they are impacting profits for the entire market. FASB 157 is certainly helping banks, as is low rates (though there is an argument that the spread is the thing, not the rate level).

        I cant say exactly how much is related to the bailouts

      • jacobh says:

        Hi Barry,

        Sorry for the late reply, we live in different timezones.
        Purely speaking from a math-perspective, you would expect profit growth since the start of the crisis:
        - Enormous deficits ran by the government
        - Laborflexibility, easy to fire redundant staff, leasing to a lower share of the GDP going to labor, and more to profits
        - Low interest expenditures, my impression is that companies have mainly been taking advantage of this the last two years.

        These three tailwinds are now coming to an end. The deficit is rapidly going down, the labor may have been cut to the minimum and the interest rates cannot go down any further.
        The share of profits/GDP is at extreme heights, and I don’t want to bet against mean-reversion here. I hope that the GDP is going to explode, to both justify the current profits and the P/E and prove me wrong in a spectacular way…

    • capitalistic says:

      Please explain how austerity will lead to profit growth.

      • supercorm says:

        Austerity will lead to profit growth… but later.

        In fact, what we are seeing now is future profits displaced in time. We are actually borrowing future profits in order to -try- to keep this economy going and avoid deflation.

        With austerity, you are making it more difficult for the short term, but you really are cleaning balance sheets for the years ahead.

        Nothing has changed since 2008. We only transferred corporations and households’ debts to the government, which has a better credit and allows us to continue borrowing at a lower rate …

      • THANKS FOR THE FORECAST!

  2. 4whatitsworth says:

    I agree however there are also some significant drags that you don’t mention here.. 1) I think that the tax increase is just now starting to hit (many won’t really comprehend it until they see their year end) 2) Obama care tax is still to come and will take a similar amount of time to process. This is going to take the savings rate down and reduces the flow of funds into the stock market.

    My guess is we go flat for a while and the fed try’s to create inflation. As it is now I can’t see the savings rate going down and government spending going down and 1% inflation rate yielding a robust economy and increasing profits. On the up side there is a possibility that large companies can continue to cut and there is a high demand for investments that yield free cash flow.

    My question at the moment is how will I know when to sell?

  3. Petey Wheatstraw says:

    “The corporate sector is actually well positioned: Balance sheets are the cleanest in a long while.”
    _____________

    Yet the government, private, and central bank balance sheets are, apparently, soiled with god only knows what, and in tatters.

    Say the neighbors: “I wonder how they get their sheets so clean . . .”

  4. Internet Tourettes says:

    I’d like to see this chart overlaid with the effective corporate tax rate. As to productivity gains, most of the gains over the last 10 years have been the result of either stagnant wages or the declining cost of capital equipment. The net-net is that the increase in corporate profits are largely due to lower wages, tax avoidance, and corporate welfare not competitive advantage or (I really hate this term) innovation.

  5. There’s that national accounting identity that says that private sector profits have to reflect either government or trade deficits. Note that this is not economic theory, it is pure math.

    The long run of steadily increasing corporate profits reflects a combination of high trade deficits, a 10-year run of high federal government deficits, and within the private sector, low household savings (reflected as well in a low share of national income going to workers).

    The long-term sustainability of each of the above circumstances is questionable.

  6. cr says:

    Beyond the obvious transfers to corporations in the debt as money system, look at trade and immigration policy causing American workers to compete with slave wages and no environmental regulations.

    Also, capture of the govt has allowed numerous monopolies to gouge citizens. Healthcare spending at 18% of GDP vs <10% in other industrialized countries is one obvious data point. Multinational corporations have configured a profits paradise for themselves that hurts most American citizens and local/national businesses.

    A dearth of investment that lowers total factor costs is another avenue worthy of investigation. Rather than paying interest on phoney FRNs, the gov't could invest in all types of infrastructure to include broadband, health, fundamental research…energy transformation…efficient roads, bridges and other transport.

  7. martin66 says:

    A log scale would make this more obvious that corporate profits have grown, in fits and starts, at more or less an average 7% p.a. since the mid-1970s and maybe before, doubling every decade. Starting at $100B in 1975 takes us to $1600B by 2015 (we might make that yet …). An interesting metric might be the growth of the share of GDP over the same time period.

  8. supercorm says:

    Zero Rates incite firms to borrow to buy back their own shares which is immediatly accretive. Buybacks leads to less shares in circulation, and more profits per share … although, many firms are doing some decent LBO using the acquirred companies profits to pay the (low interest for now) debt. That could also change if rates rises …

    Wages, Effective Tax Rate, Dollar and Rates, all were falling until now, contributing to send margins to record levels as well. I cant see any of those 4 factors marginally contributing going forward.

    Margin Debt level and sentiment at record levels highlighting complacency. You don’t need a huge shock from here to see too many people looking at a too small exit door.

  9. tradeking13 says:

    Cool. Now we can close those tax loopholes and get corporations to pay their fair share.

  10. catclub says:

    Can we see this chart with profits divided by some measure of the US economy, such as GDP? Profits in 2013 are nine times as large as in 1980, but I suspect the economy is bigger now, also.

  11. Alex says:

    All of this is a giant test of one’s selectivity in terms of information analysis. Many metrics exhibit a lot of economic wreckage and anemic performance. But many other indicators show notable improvement. This period is a bit like the early 80s, when it was still easy to make the case that things were going to get a lot worse, but if you squinted at the data you could see a bottoming anyway. Unemployment was still very high, U.S. corporations had not entirely finished restructure, the Japanese were killing everybody doing what they were really good at (and had not yet diversified into things they stink at), and many citizens were still raw after a series of pretty bad outcomes in the 70s.

    I am not saying we are on verge of a big bull market, more that this is a period of economic ambiguity. And as such, it is a good time to see the glass half-full in some ways, yet half-empty in others. Sweeping statements based on certain specific economic metrics are dangerous in this type of environment. They will either keep you out of the market much more than you should, or they will lead you to invest in certain sectors that are probably going to be weak for a long time. Sweeping statements about “markets” are also unhelpful. Every time I hear someone refer to the market, I want to ask, which one? Safeway or Giant!? It is vital one is specific and clear about what is good or bad regarding the particular “market” in question.

    Time frames matter also. If you are trading, this or that headline matters. In contrast, how concerned should we be about any of these metrics, given a long-term view? If we are seeing more improvement than weakness now, why not be optimistic and just go long…for a long time? If you think we are over-valued, then go long incrementally.

  12. Steve Hamlin says:

    BR wrote: “I am hard pressed to believe that corporate profits are due exclusively to ultra-low rates.”

    Low rate + low taxes. See: http://www.businessinsider.com/levkovich-on-ebit-interest-and-taxes-2013-10

    “The margin story continues to be far less about efficiencies than smart tax and balance sheet planning,” said Citi’s Tobias Levkovich…The broad data shows that overall S&P 500 operating margins have been flat to down for more than six quarters and the true story behind net margins has been lower effective tax rates and interest expense.”

  13. Keith R says:

    We can compare today’s figure of $1.8T to the 1999 cyclical peak of $0.6T to get a good idea of the growth over the last ~15 years. Essentially an increase of 200%. 50% of that increase can readily be attributed to growth in GDP, but the remainder is less clear. A few throughts:

    -I do believe that most multi-nationals pay less tax than they once did. From my experience many of the “cutting edge” tax strategies from the late 90′s are now more commonplace.
    -I am less certain if the corporate profit growth in the long haul is due to cutting costs for employees. Profit growth seemed to grow considerably in the 2002-2008, but there was some keen competition for employees during that period too.
    -Hussman believes that the growth is due to the federal deficit, but that does not explain the trend in the 1980′s. The deficit leaped during the 1981-1986 period, but that does not appear to be a time of big profit growth per the chart.
    -I have a fuzzy feeling that companies compete on price less than they once did. Earlier in my corporate career I recall a greater willingness to cut prices to take share. In the last few years I believe that the feeling was more frequently that we should raise prices at least with the rate of inflation. Nobody wins a price war.

    Clearly the corporate “citizen” has gained economic power versus consumers and government for a variety of reasons. I wish I had a better sense for whether this will revert to mean.

  14. Frilton Miedman says:

    Operative phrase – “after tax”

    With a 9-fold increase in corporate profits since 1980 compared to flat wages since 1989, it might be time to ask – “Where’s the trickle down?”
    (Answer – workers in China, Mexico, India, executive salaries & offshore corporate cash hoards)

    Notably, the GOP has recently stopped using the term “job creators”, which had replaced the previous “trickle down”, the question to ask is whether the GOP believes they can simply create a new term to convince enough voters that low taxes on corporations and the wealthy are conducive to anyone else.

    I pray to God it doesn’t take another depression for those voters to see it.

  15. DeDude says:

    I can understand the 2002-07 explosion in profits (almost 3x). This was the Bush II “war on terror and stuff”, which was outsourced to the private sector with absurd profit margins handed out to the lucky friends of Cheney. The much smaller 30% (1400 to 1800) increase of the past 2 years is a little more difficult to understand. If those 400 billion were all to be explained by corporations paying less on their debt then corporate debt (about 10 trillion) would have to be paying about 4% less than they “should”. I don’t think we are quite there but would think that corporations are paying at least 2% less. So a good bulk of that profit growth is probably low rates.

    PS: I think this is the kind of parameter that is much better to show on a log scale.

  16. Sam Ro says:

    Analyst Annihilates CAPE-Toting, Market-Crash Fear Mongers With A 5-Point Takedown

    http://www.businessinsider.com/sean-darby-warns-against-relying-on-cape-2013-10

    • BenGraham says:

      That “annihilation”, Sam, forgets that profits relative to sales, gdp or book is still very high. It also completely ignore the argument, based on nation income accounting, that the surge in profits is DIRECTLY related to deficit. That’s right. It’s not an intuitive, easy to understand argument, which means it doesn’t lend itself to snappy headlines, witty arguments and short articles- but it is nonetheless compelling and intellectually rigorous (See Hussman or GMO for more). Further, when any argument rests on only a few of the relevant points, it ain’t strong intellectually.

      BR, take a look at pre-tax profits. Similar, but you’ll notice in comparing the two that corporate tax rates have fallen dramatically leading to higher net profits. I think its prudent to reflect on how long that can last? So, yes, profits have surged, but at they sustainable? CAPE essentially takes that into consideration.

  17. gc says:

    Is there a significant component from the financial sector? If so, can the FASB standard return to mark to market because everything is so healthy?

  18. Marc P says:

    The data seem to be incomplete. “Corporate profits” meaning Dow, S&P, Russell, or all public and private companies? Seems to be some selection bias here.

    Of this large increase in profits, are there a few dominant companies with outsized profits? For example, what percentage are represented by Apple and Google?

    What percentage are represented by industries that have oligopoly pricing, such as home broadband, mobile phones, pharmaceuticals, oil, etc.? Or the financial services industry?

    How much of the profits are due to low interest rates? Fortune 500 companies have historically-low borrowing rates, and their profits go up by the interest saved. I have been looking forward to seeing an analysis of this. What are the data?

    In other words, is it that “corporations” are generally doing really well, or only specific companies and sectors, or those who get to save a lot on interest? Only then can we look at whether these factors will continue or increase. Otherwise the chart means little.

  19. abetasoup says:

    http://research.stlouisfed.org/fredgraph.png?g=nWa

    How much longer will it be before corporations realize the amount of sales growth they are leaving on the table due to this massive “lean & green” campaign they’ve been waging since the crisis? Velocity is still dead due to lending standards, a persistent unemployment problem, and a long-term wage-raping of workers in the nation.

    The ultra wealthy can only create so much demand. We are witnessing diminishing returns in it’s most obvious form, but between politicians and the media, stating that claim is considered “class warfare.” How can demand increase when the bulk of the population is either jobless or without bargaining power over their wage?

    We need companies to realize that society and their operations would be better sustained over the long-run if they started to re-invest more in their companies and workforce. Whether it’s more pay, or less hours and more employees… something has to give. I don’t see profits continuing this trend much longer, and I hope that when it stops it’s because wages are increasing and not because of a recession. Analysts want to bitch about slow revenue growth, but then shrug off any mention of paying employees more money. If only 10% of current profits were to “trickle down” to workers, there would be an additional $182.14 BILLION (1.16% of GDP) dollars in the pockets of consumers more likely to spend that cash rather than hoard it. I’d love to see profits shrink if it meant higher pay… which would eventually lead to higher sales and higher profits.

  20. DeDude says:

    Another source of increased profits could be the drastic fall in natural gas prices. I am not sure exactly how to calculate how much savings the corporate sector has gotten from it but they are only paying about 30% of what they used to pay for natural gas. If all of those saving were to go into profit it could add up.

  21. willid3 says:

    i wonder how profits can keep growing when customers either have lower incomes (consumers) or quit spending (governments). seems like corporations tried to cut costs by exports their labor force. and now have issues selling back into the country they exported labor from. and selling into the new countries where they exported too aren’t making up the loss in local incomes. and governments have been bitten by that austerity bug (from what looks like back in 1920s just before the great depression. the only reason it got changed was because so many were out of work that too many were going to vote eliminate capitalism because it didnt work for them. wonder how long before that happens again

  22. victor says:

    Thanksgiving just around the corner, turkeys are at full confidence.

  23. [...] –Corporate Profits: Barry Ritholtz says the Fed can’t take all the credit for corporate profits. “After tax Corporate Profits are at all time highs. And while the inclination is to say this is driven exclusively by programs like QE and ZIRP, the pre-crisis profit picture was also very rosy. (Rates were very low than also). I am hard pressed to believe that corporate profits are due exclusively to ultra-low rates. There is no doubt that financing costs are lower, but that is offset by tightened credit. Demand for goods and services has been increasing only modestly. While private sector growth has been respectable 3-4% — the public sector continues to be a net negative drag on growth. State and municipality layoffs also have the effect of depressing demand. The corporate sector is actually well positioned: Balance sheets are the cleanest in a long while. Companies are running very efficiently, with limited head count (we see evidence of this in stubbornly high unemployment rates). Productivity gains are hard to come by because productivity has risen so much over the past 20 years. Business Intelligence software is allowing firms to make changes on the fly — it used to take several quarters before enough intel could be gathered to shift manufacturing or supply chain decisions. It now happens in real time.” [...]