Corporate Profits: One Chart, Five Thoughts

by JT McGee

Recently I stumbled upon a post at Fool.com, which highlighted the relationship between corporate profits and total economic output. Seeing as I’m not much for narrative and far more interested in charts and numbers, I took to this chart like white on rice:

Corporate profits as a percentage of GDP.

Immediately, I started noticing some interesting things about this chart:

1) Corporate profits very rarely dip below 4.5% as a proportion of total economic output. I’m not entirely sure why this line seems so resilient.

2) As you can see toward the latter end of the chart, 10% seems to be the “top” for corporate profits before we slam back into the 4% bottom.

3) The correlation between corporate profits as a proportion of GDP and the movements of the stock market are incredibly related. Notice the two most recent tops and how well they correspond with tops in the S&P500. Also, note the biggest stock market crash in 1987 followed the only real dip below 4%. Interesting…

4) Efficiency boom – I have assigned a name to the most recent boom in corporate profits. While much of the first “hump” in the 2000s can be attributed to a boom in general credit expansion, the second boom appears to be little more than an efficiency boom. That is to say that low employment means low wages, and naturally the relative share of corporate profits as a percentage of GDP would grow tremendously.

5) War – We see extremely large peaks in corporate profits as a share of GDP during war time. In 1951, the United States was involved in the Korean War; and in the 1960s the less expensive (but far more remembered) Vietnam War. In the 2000s, the wars in Afghanistan and Iraq begin and corporate profits rise higher alongside new foreign conquests. I do want to make something very clear; the current wars – though often forgotten – will easily be the most costly. So far, Iraq and Afghanistan have cost us 1/4th of the cost of our involvement in World War II – and there is no real end in sight.

Think with Me

Do you notice any other corollaries between history and profits? There is nearly 60 years of data here on corporate profits. Let’s make use of it.

Do you see any trends between your recollection of history and the historic trends in corporate profits?

{ 1 comment… read it below or add one }

PKamp3 December 5, 2011 at 11:13

Yeah, it does seem to be pretty range bound between 4.5% and 10%. The largest component of GDP is private consumption, so maybe spending peaks (with it, corporate profits) and then it heads back to the trough? It doesn’t explain the current reading, although one point I’ve seen made is that even though profits are high there is still a debt overhang for small companies. Interesting stuff.

Reply

Leave a Comment

*

Previous post:

Next post: