US corporate profits boom

Economic growth in the major capitalist economies may be weak, but corporate profits continue to rise strongly, at least among the largest companies in the US.   Corporate earnings figures of the top US companies for the second quarter of 2011 have been coming out over the last couple of weeks.  Strong second-quarter earnings from McDonald’s, General Electric and Caterpillar on Friday are just the latest evidence.

The rise in profits has been achieved not by expanding investment or production much but by cutting back on costs (i.e cutting the denominator in Marx’s formula for the rate of profit – see my previous post, The Great Recession and cutting the denominator, 14 July 2011).   Companies remain reluctant to spend the $1.9 trillion in cash they’ve accumulated.  So US unemployment stays stuck at 9.2% and real wages are falling.

“I’ve never seen labour markets this weak in 35 years of research,” says Andrew Sum, director of the Center for Labor Market Studies at Northeastern University (  According to Sum, wages and salaries accounted for just 1% of the growth in US national income in the first 18 months since the Great Recession officially ended in June 2009.  In the same period after the 2001 recession, wages and salaries accounted for 15%; it was 50% after the 1991-92 recession; and 25% after the 1981-82 recession.  Corporate profits, by contrast, accounted for an unprecedented 88% of national income during the last 18 months, compared with 53% after the 2001 recession, nothing after the 1991-92 recession and 28% after the 1981-82 recession.

Sum argues that US corporations are expanding overseas, but not so much at home. McDonalds and Caterpillar said overseas sales growth outperformed the US in the April-June quarter.  US-based multinational companies have been focused overseas for years: in the 2000s, they added 2.4 million jobs in foreign countries and cut 2.9 million jobs in the United States, according to the US Commerce Department.

In a previous post (see Returning to the long view, 15 June 2011), I argued that, although US corporate profits were still rising and had surpassed their previous peak back in 2007, there were signs that the pace of growth was slowing and that the rate of profit (not the mass) was likely to start to fall back before this year is out.  That was based on data provided by the US Bureau of Economic Analysis for the first quarter of 2011. We don’t have the data for the second quarter yet, so I cannot confirm if my forecast is bearing out.

In the meantime, the corporate earnings announcements for the top US companies suggest that the US profits boom is still in place.  Indeed, the S&P agency forecast for the earnings of the top 500 companies in Q2’2011 is that it will surpass the earnings reached in Q2’2007, the last peak.  But S&P data also show that corporate sales have not returned yet to the peak of mid-2008.  So profits are still being achieved by more by reductions in costs than by increased sales revenues.

4 Responses to “US corporate profits boom”

  1. Mike B) Says:

    Real wages have been flat or below their highs of 1964 since 1964. Of course, productivity has shot up, as always, by about 1.5% a year. Meanwhile, our rulers have sent their capital overseas to exploit even cheaper labour power which has led, among other things, to a lower value of the US dollar. You’d think our rulers would recognise their moral duty and move manufacturing back to the USA seeing that real labour costs are well below what they were in 1964. I guess they’re only in it for the money.

  2. purple Says:

    A big chunk of the U.S. corporate elite no longer considers the domestic consumer indispensable. They are getting a rising share of their profits overseas and expect the trend to continue or even go parabolic.

    The U.S. still has the central role in the global financial and political architecture but it can no longer sustain those costs (military, and financial via the dollar’s role) and have a middle class.

    I think any reasonable prediction shows the U.S. political system will not be able to handle those stresses.

  3. John Reimann Says:

    The article focuses on one cause for crises in capitalism: The tendency for the rate of profit to fall and seems to be saying that this is the sole explanation for this and past crises.

    However, I believe there are other inherent contradictions of capitalism. One is the tendency towards overproduction. In recent decades, this tendency has been expressed through the massive build-up of debt, both public and private. Mainly through the low interest rate policies of the central banks, the state tried to evade the tendency towards overproduction by encouraging an increase in private debt. Also, there was the enormous increase in public debt (the “sovereign debt crisis”).

    These two contradictions interact, because another aspect of how the tendency towards a falling rate of profit was decreased was through wide scale wage cuts. This has been done through shifting production to low wage regions of the world as well as through cutting wages in the high wage regions. But this has only worsened the tendency towards overproduction. We see here in the US (which is the world’s largest market by far) continual articles in the Wall St. Journal talking about the limited market because consumers are tapped out. Despite the fact that profits have recovered here (partly because of the reduction in labor costs, meaning wages), the economy is threatening to slip back into recession, exactly because of the overproduction issue.

    In other words, an attempt to resolve one of these contradictions only worsens the other.

    Then there is the issue of world production and a world market vs. the existence of the nation states. We see this contradiction expressing itself in the uncertainty in the world currency system. Capitalists have to know what one currency will be worth vs. another in the months and years to come, or else how can they invest since in the main they invest for world production and world sales? The largest-scale attempt to get around this problem was the Bretton Woods agreement after WW II, which established a set value for the dollar and established the dollar as the world currency. As is befitting any respectable capitalist nation, US capitalism used this agreement to force its costs onto the rest of the capitalist world, thus shattering a basic part of the Agreement. But there is no alternative to the dollar, so world currency instability is the order of the day.

    Another large scale attempt to get around this contradiction was the creation of the euro. We see now how successful that step was, with the very real threat of the collapse of this currency in the coming years. (That, in itself, would be devastating for capitalism.)

    This contradiction also is connected with the others as there are different traditions in different regions of the world, leading to different rates of profit, different living standards, etc. This means that the currencies, which reflect the situations in the different nations, vary in relation to each other. but this variation is not a smooth, steady one; it proceeds by shocks and crises.

    To return to this article: It basically measures the downturns since WW II. But that’s exactly the problem: That period has ended and we are entering a new one. The current crisis is much more comparable to the Great Depression with the difference being that the state plays a larger role in the economy than it did back then. In fact, if you look at the first graph in the article, you will see that the rate of profit after WW II was much higher than in 1929 and it never reached the 1929 level — until 2008. Roberts looks at the average length of recessions and predicts, based on that, that this one will end around 2014 to 2016. But I think his method is mistaken so I don’t think his prediction is necessarily valid.

  4. michael roberts Says:

    John raises some important arguments about the causes of capitalist crisis. I think I answered the question on whether overproduction is a better explanation of crisis or at least equally important, in my book, The Great Recession. It’s a hoary old question and has been dealt with by a number of Marxist economists, including Marx himself.

    Suffice it so say that Marx saw overproduction as a symptom of overaccumulation. Overaccumulation is where capital (both constant and variable) are accumulated to the point where profits become insufficient to reproduce capital for future production. In other words, profitability is too low. Overproduction is more a description of the crisis, where there are too many goods and not enough buyers at the prices of production. Overproduction does not explain how the crisis comes about.

    John is right to argue that capitalism aims to conquer the world but comes up against the barriers of the nation state, leading to different rates of profit etc. But the underlying drive to accumulate and the tendency of the rate of profit to fall still operate as the most important law(s) of political economy, to use Marx’s phrase. But it does mean that global profitability is unevenly distributed.

    The rate of profit was much higher in the second world war than in the whole period since. That shows that a war can completely shift the rate of profit to a new level by physically destroying labour and plant, or shifting profits into the hands of US capitalism from other capital.

    I agree with him that we are in a similar period as in the Great Depression. That began when the rate of profit started to fall in 1929 leading to a collapse in total profits that lasted until 1932. Then there was a recovery until 1937 before capitalism started to falter again before the war cut across. In other words, the down phase in profitability was still in play and would have lasted until 1946, if the war had not intervened.

    It is the same now. This down phase began in 1997 and assuming that no world war cuts across (as it did not during the down phase for British capitalist profitability from 1873-1889 – see the chapter in my book), then it will continue to at least 2014-16 and will only end with another big recession.

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