A Bad Decade for Nonfinancial Profits

Posted by: Michael Mandel on March 04

I continue on my recent task of abusing the decade from 1997-2007. The question is—how much of corporate profit growth during this decade was driven by the financial sector? The answer is: Almost all of it.

Take a look at this chart.

Section1All_xls228_12782_image001.gif

The top line is nonfinancial corporate profits, adjusted for inflation (in 1997 dollars). This number is ‘after-tax profits from current production’ as calculated by the Bureau of Economic Analysis (they call it “Profits after tax with IVA and CCAdj”—don’t ask). It does not include write-offs, and it adjusts for various distortions imposed by the tax code. That is, it’s supposed to be the best economic measure of profits.

Based on this measure, you can see that 1987-97 was a good decade for nonfinancial corporations. Their real profits rose a lot.

But the decade 1997-2007 was weak, profit-wise. Real nonfinancial corporate profits gyrate up and down, but end up in roughly the same place—only 6% higher in 2007 than they were in 1997.

Here’s another way of getting at the same point. This table shows the real profits of both nonfinancial and financial corporations in 1997. It also shows the average profits over the next ten years, measured in 1997 dollars. For nonfinancial corporations, the decade from 1998-2007 was worse, on average, than 1997.

after-tax domestic corporate profits, in billions of
1997 dollars 
1997       average of 1998-2007
nonfinancial corporations 411.5 370.0
financial corporations 100.0 172.1


Two caveats here. First, there are quite a few different profit measures…some of them give different answers. Second, and more important, these figures measures “domestic” profits, which includes exports from U.S. production but does not include manufacturing and other operations overseas. It may be that nonfinancial corporations had profitable plants overseas—but that does not take away from the point that the decade 1997-2007 was a bad one for the U.S.

The bottom line on 97-2007: Very little or no real wage growth for most Americans, very little real profit growth for the domestic operations of nonfinancial corporations.

TrackBack URL for this entry: http://blogs.businessweek.com/mt/mt-tb.cgi/

Reader Comments

Kartik

March 4, 2009 03:41 AM

Why take 1997-2007? Take 1998-2008, and the comparison becomes even worse due to 2008 being included.

It appears that outsourcing did not help profits, but rather may have averted outright losses.

US real wages will not rise until China's per-capita GDP becomes about half that of the OECD average. This will take until about 2017. Until then, US wages will not rise.

Mike Mandel

March 4, 2009 06:33 AM

1997 is the profit peak for the 1990s, and 2007 is the last year before the financial crisis really hit.

I've thought a lot about the initial year here. I would have loved for the initial year to be 1999 or even 2000. But the data keep pulling me to 1997.

TE

March 4, 2009 06:34 AM

Globalization was sold to US business by none other than the financial sector. Finance won and everyone else lost.

CompEng

March 4, 2009 10:31 AM

Yeah, it sure looks like Globalization leveled the field in productive industries and finance made up the difference.

CompEng

March 4, 2009 03:48 PM

Actually, I take that back. It looks like the dot-com bust and the succeeding downturn wiped out a lot of profits, and it took a while to recover.
Then the Fed's efforts to prime the pump drove another bubble that had a large finance component.

I don't think the resolution on "productive" industries is fine enough to tell the globalization story, although it probably shows up in this graph as part of the uptick.

GK

March 4, 2009 07:31 PM

So it turns out that the massive pay made by Investment Bankers, Traders, and Equity Researchers was a 20-year bubble.

The speed at which a new MBA grad going in I-Banking rose, after 3 years, to make $500K+ never quite seemed to be an efficient manifestation of supply/demand.

Viking

March 4, 2009 09:41 PM

Yes,so these numbers prove that the "prosperity" of the last decade was almost exclusively because of the 3-4 trillion we borrowed from foreigners.Unless we are willing to tighten our belts for a decade or longer and start living within our means,we are really doomed and our kids and grandkids can look forward to a bleak future.

ACS

March 4, 2009 10:59 PM

The problem being, of course, that 1997 represented the peak of a bubble in nonfinancial sector profits and that 2007 represented the peak of a bubble in home values. Sure, you're measuring from peak to peak (which is reasonable), but you're also measuring profits from one unsustainable bubble to an unsustainable bubble of the opposite sort.

In other words, I'm not sure you can reasonably draw the conclusions you're drawing.

Joe Cushing

March 5, 2009 08:26 AM

I'm holding a ruler up to your chart. I see an upward trend that has only a tiny bit softer slope at the end. The three peaks on the chart line up almost in a straight line. The middle peak is barely cut off. What has happened here is that the current economic cycle does not line up with the last one in nice 10 year intervals.* 1987 to 1997 is a peak to peak comparison where 1997 to 2007 is a peak to downward slope comparison. On a second look it is worse than that. 1987 is pre-peak. It is more appropriate to compare peak to peak or trough to trough than to pick two 10 year periods. If you compare 1987 to 1997 to 1997 to 2006, 90% of the drama goes away. Then you could adjust for the different sized cycles by annualizing the growth in profits. According to your graph, profits grew at approximately 5.4% from 1988 to 1997. They grew 2.5% from 1997 to 2006.

This reveals the problem with my ruler analysis in the beginning. While nominal growth was roughly the same, the return was lower because growth is supposed to be exponential. In order for the two 9 year periods to be the same, 2006 profits would have had to been 645. So, even when you compare peak to peak, the trend is not good.

*I’ve read what you said about picking periods of 10 years to eliminate bias in comparing periods. I think this can work for long periods of several economic cycles but when you are comparing one cycle to another, you really need to compare the same part of one cycle to another. Also, picking round numbers does not stop you from choosing where to start and stop your comparison.

Ajay

March 10, 2009 02:15 AM

Your assumptions are flawed, why should we see any real wage or profit growth in the era of globalization? If markets are indeed more competitive today, we should be lucky to see margins hold up at all. That they actually increased shows the great success of the American free market. The last decade was a good one but there was a giant missed opportunity for an internet boom, the capital for which was foolishly dumped into a housing bubble and overpriced equity markets.

Thank you for your interest. This blog is no longer active.

 

About

Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

BW Mall - Sponsored Links

Buy a link now!