Friday, 24 January 2014

Corporate profits in the US: finance vs non-finance

I was looking for some data in the Economic Report of the President and I stumbled upon table B-91: Corporate profits by industry, 1964-2012.

Here's a graph I got from the data, comparing corporate profits of the finance industry vs the non-financial industries from 1964 to 2012.
Source: Economic Report of the President, Table B-91
Notice the divergence of profits of the non-financial (real) sector in the 90-ies, and particularly in the pre-crisis boom. The rise of profits in the real sector was immense compared to the financial sector at that time. In fact throughout the past 50 years the gap in total profits between finance and the real sector was widening (albeit a few episodes). This can be a good indicator of how one needs a strong financial industry to support the growth of the real economy. 

Notice another even more interesting fact. As real sector profits clearly declined by the end of the 1990s we don't recall those times of being characterized by a particularly strong recession. The dot-com boom and the September 11th attacks apparently didn't influence corporate profits that much at all. However the period immediately after September 11th, when the Fed was holding interest rates down at 1% up until 2004, we can see a huge rise in real sector profits (finance industry as well). 

Then comes the bust, caused by a series of interlinked instabilities, where the financial sector suffers first, and the real sector follows. This further emphasizes the point that a severe recession can only be triggered by a collapse of the financial sector, as we can see several slumps in the financial sector leading to a decline of profits in the real economy, but not the other way around. 

The story of corporate profits in finance tends to be linked with the issue of a huge rise of inequality from the 1980s till today (the Atkinson, Piketty and Saez papers show the rise in inequality starting by the end of the 1970s). However, simultaneously with the growth of financial sector profits and the wealth of the richest 1% and 10% of Americans, there was a massive growth of the real sector, in which period many major companies we know today have emerged. Particularly the IT companies like Microsoft, Dell, Oracle, Apple and the internet giants Google, Facebook, Amazon etc. Even giants such as Wall Mart (founded in 1962, became a national giant in the 1980s and the 1990s), not to mention the rapid rise of profits in the oil industry and the automotive industry. For more on this debate see my earlier texts on the 1% vs the 99% debate. 

Looking at the profits divided by industry the picture is slightly different:
Source: Economic Report of the President, Table B-91
Now we can see that individually, finance became the most profitable industry sometime around 1999 following the first apparent decline in manufacturing profits. As they both bounced back briefly until 2006 the pattern of the slump is again evident. (Notice also the dot-com bust that affected the IT sector in 2000, after which it recovered rather well.)

Particularly in the last decade we can notice the apparent correlation between the changes in corporate profits in the real sector to those of the finance industry, thus further confirming the importance of this industry in creating the scope for growth in the real economy.  

Finally, these graphs are far from proving anything, but they do point to an interesting direction. 

7 comments:

  1. Another great & interesting piece!
    This is great stuff, and something people don't always understand: "This can be a good indicator of how one needs a strong financial industry to support the growth of the real economy. "

    May I add a point, about even faster globalization since the second half of the 90s that could have had major effects on the profits (China in WTO in 2001?).
    I think it was even stronger effect than FED's "low" interest rate 2002-2004, because if you take a look at FFrate, 10YTsy and Moody's BAA corporate rate (http://research.stlouisfed.org/fredgraph.png?g=row), you see that in that period low rate seemed useless as 10y bond/BAA remained higher. On the other side, the structural collateral shortage/savings glut hypothesis could explain a part of the surge in profit if the rate was much lower than it would otherwise be, and that in the wider time period.

    Greets!
    P.

    ReplyDelete
    Replies
    1. interesting point, I have to admit I haven't looked into that, but it does seem plausible.

      Delete
    2. "This can be a good indicator of how one needs a strong financial industry to support the growth of the real economy. "
      the problem is when capital is not supporting long term investments but short term profits.

      Delete
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