The closing scissors and profits

Global corporate profits growth is heading south, according to analysis by JP Morgan economists.  JP Morgan estimates that, after surging a humungous 89% (4q moving ave) in 2021, global corporate profits moderated to a still-solid 24% in the year ending in 2Q22.  And they reckon that “on net, the level of profits is 17% above its pre-pandemic trend, but still making up for lost earnings through the pandemic.”  However, JP Morgan expects “slowing in profit growth in the coming quarters as inflation cools while labor markets remain tight. Additional pressure is coming from rising corporate borrowing rates as central banks press on with the steepest tightening cycle in decades.” The scissors of a future slump (falling profits and rising interest rates) are beginning to close.

During the post-pandemic recovery, corporate profit margins (that’s the difference between revenues and costs per unit of production) reached multi-decade highs as the surge in inflation boosted corporate pricing power while wages languished.

But things are changing in 2022.  Profit margins are sliding down as costs of production rise and revenue growth slows.

When broken down by sector, JP Morgan finds that each of the 10 sectors comprising the total economy show a slowing in earnings growth from multi-decade highs posted in 2021, although only four have experienced outright contraction since the beginning of the year.  Although the profits boom in 2021 was broad-based in all sectors, it is clear from the data that the bulk of profit gains were in energy and raw materials including food.  And that’s where the biggest falls are coming.

In the past, I have constructed a measure of global corporate profits.  My measure is a GDP-weighted average of year-on-year corporate profits from five countries (US, Japan, China, Germany and the UK).  This is a smaller universe than that compiled by JP Morgan economists.  They track MSCI corporate earnings from 29 countries.  That sounds better but there are some serious caveats to the JP Morgan measure.  First, it is based on reported earnings in company accounts that always exaggerate earnings.  My measure relies on more accurate national government measures of profit. And second, JP Morgan measures the change in those profits on a 4q moving average, not year-on-year for each quarter.  That tends to make the up and down changes more exaggerated than year-on-year measures.

On my model, the change in global corporate profits to H1 2022 looks like this:

Several things emerge from this figure.  First, global corporate profit growth had ground to a halt even before the COVID pandemic broke and lockdowns and the collapse of international trade ensued (-2.1% yoy in Q4 2019). Second, the huge statistical recovery in 2021 (peaking at 54.4% in Q2 2021) has now given way to a fast slowdown in year-on-year profits in 2022 (to just 6.2% in H1 2022). 

How does the JP Morgan model compare with mine? 

Considering the differences in the data between the two models, there is still quite a similar trend found.  There was a boom in profits after the mini-recession of 2016, then a fall in 2019 (heralding a new slump in investment and GDP in the major economies), and then the fall in the pandemic (although my figures show a small rise).  The recovery of 2021 is more moderate with my data than JP Morgan’s.  The first half of 2022 is comparable.

Both data show what JP Morgan concludes, “relative to its pre-pandemic trend, cumulative global profits since the pandemic are still over 20% depressed.”  And now profits growth is disappearing.  JP Morgan forecasts that “pricing power is expected to ease––particularly in energy––while wage pressures are unlikely to moderate as quickly. Combined with rising interest rates, profit margins will fall, dampening overall earnings.”  What I have called in the past, the scissors of slump (rising interest rates and falling profits), are beginning to close.

Why does tracking the change in the profits of the capitalist sector globally matter?  As I have argued in numerous places, profits are the driving force of capitalist investment and therefore employment and income growth.  If the profitability of capitalist investment falls and eventually leads to a fall in total profits, it is the strongest indicator of an impending slump in capitalist production.  The close (if lagged) relationship between profits and investment is well established by several studies including my own. 

JP Morgan is certainly convinced of the relationship between profits and investment, with the former leading the latter: we expect corporate profit growth to slow further in coming quarters. This weakness will negatively feed back on business capex.”

26 thoughts on “The closing scissors and profits

  1. Yesterday, Larry Summers tweeted that he was very worried about the USA’s persistent inflation, and said that, in order for core inflation to lower to 2.0%, unemployment has to rise to at least 4.5%. Now, of course, others disagreed with him on this aspect, pointing out that, according to some metrics, inflation is lowering. The relevance of this debate is not the numbers or the methodologies, but its class aspect: the greatest achievement of Cold War capitalism was to create a middle class class consciousness. Like a light bulb, it is shining its brightest before it dies. As we’ve seen in Marx (Capital), a middle class capitalism is impossible, and a middle class consensus capitalism is, by its very nature, unstable.

    The USA is going to sanction China even though it didn’t invade Taiwan because it has to do it in order to impede China to invade Taiwan. This means the intention of the USG was always to sanction China, with or without a Taiwan casus belli. As the Ukrainian War rages on, there’s a pattern here, where the USA – the thalassocracy of the 20th and 21st centuries – is trying to crack open the hard nut of the Eurasian land mass (the “Heartland”).

    Yesterday, Dimitry Peskov (Putin’s press secretary) reiterated Putin’s statement that the end of the Unipolar World Order is unavoidable at this point, therefore agreeing fully with their “Chinese comrades” in this diagnosis. That means China and Russia – the two most powerful anti-USA nations, with info and intelligence that are available to nobody else on the USG – are confident enough on the irreversible decline of the American Empire. It is a good indication for any historian when the main antagonist of your object of study comes up with a diagnosis that corroborates with your evidence on the object of study, as it eliminates historian bias.

    Last but not least, we have the “dedollarization question”. As I’ve mentioned here earlier, SE Asia was the only region of the world that truly flourished thanks to capitalism after the 1990s. It is, if don’t count Europe, the last bastion of capital reserves the USA can recall with the Dollar Standard. Well, those reserves are bleeding out fast since Trump started to print to the trillions at the end of his reign (this practice has become routine in Biden’s reign). An article from Asia Times, citing a private source, claims SE Asia has already lost USD 590 billion in reserves just this year (i.e. since “the end of 2021”). Once SE Asia becomes the new Latin America, the USA will have to start to recall capital from its first class provinces, i.e. Europe and Japan. Some Europeans already claim this Ukrainian War is just a pretext of the USA to start doing so to Europe.

  2. Mike Konczal at the Roosevelt Institute, June 2022, published “Prices, Profits, and Power”, on page 4 he writes,
    “While markups averaged 1.26 between 1960 and 1980, they have been on a slow and consistent rise since then, averaging 1.56 during the 2010s. In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost. In other words, in 2021, we see a sharp increase in the 30-year trend of firms in the aggregate decoupling their prices from their underlying costs.”
    “In 2021, markups suddenly increased to 1.72—that is, the average markup charged in 2021 was 72 percent above marginal cost.”
    Konczal cites the paper “The Rise of Market Power and the Macroeconomic Implications” by Jan De Loeker and Jan Eeckhout and Gabriel Unger. This paper tracked markups of 3,900 companies between 1955 and 2016. Konczal’s paper continued the calculation to 2022. The De Loekerm, Eeckout and Unger paper’s abstract states,
    “We document the evolution of market power based on firm-level data for the U.S. economy since 1955. We measure both markups and profitability. In 1980, aggregate markups start to rise from 21% above marginal cost to 61% now. . . .We also find an increase in the average profit rate from 1% to 8%.”

    1. Dear Ben, an interesting piece on mark-ups and profit margins. There is no doubt that margins have risen particularly for larger companies and so have profits relative to wages since the 1980s. This is the neoliberal recovery in action. But the definition of profitability as expressed by the second paper is not the same as that of the Marxian measure. They call “the profit rate, which is total sales minus all costs (including overhead and the expenditure on capital) as a share of sales.” This is really a version of the rate of surplus value in Marxist terms not the rate of profit, The authors only deduct capital used in annual production. The Marxist definition is profits/divided by all constant capital (fixed assets and raw materials) plus wages. That Marxist measure shows a recovery in profitability in the US from the early 1980s to the end of the century and then a downward trend for the non-financial sector. I would argue that the Marxist measure has more explanatory power for crises.

      1. Michael why you are absolutely right that profits drive investment, the Marxist enterprise rate of profit is, after tax profits divided by fixed and circulating capital (the most accurate) or by fixed and variable capital but never wages which being annualised is too big a figure.

  3. Would be interesting to know ; what percent of increase/decline in profits is accounted for by the increase/decline in profits for the energy sector; same thing regarding capex.

    1. A lot. Just look at the third figure of this post (from top to bottom).

      The problem with these super profits from the energy sector is that they’re monopoly rents, not “true” profit rates (not true in the colloquial sense, that it is not promoting investment, therefore not promoting the development of the productive forces in the capitalist world).

      Yes, “industrials” is also on the list of the super profits, but, since we know investment is falling, that can only be from either creative classification by the source and/or monopoly rent.

      1. “A lot. Just look at the third figure of this post (from top to bottom).”

        Yes, in part mine was a rhetorical question since I’ve done some investigation into the relation of petroleum sector profits and investments to that of capitalism as a whole.

        “The problem with these super profits from the energy sector is that they’re monopoly rents, not “true” profit rates (not true in the colloquial sense, that it is not promoting investment, therefore not promoting the development of the productive forces in the capitalist world).”

        That’s not exactly or always the case. If these were not profits but rents, then indeed they wouldn’t drive investment, but the historical facts are that petroleum sector capex investments are closely linked to profitability, and overproduction.

        So either the petroleum sector corporations occupy a position and a function akin to “improving landlords” in British agricultural history (a history Marx seemed unaware of) or… these aren’t simply rents, but redistributions of wealth such that the petroleum sector which has experienced extreme swings in profitability, might achieve something like an average or general rate of profit.

      2. Very simple: the energy producers are cutting production, thus rising prices. That’s what OPEC+ has been doing these last years (Saudi Arabia famously declining to obey the USA’s order to increase production).

        When prices rise because production is lower without any rise in labor productivity (surplus rate), we have super-profits. When those super-profits extend for a very long period of time and/or in such an intensity that it causes the overall economy to slow down or even recess, we could, theoretically, diagnose it as monopoly rent.

        In oil and gas cases, we have that the companies and countries that dominate the market are not building new technologies or new infrastructure and equipment to give less of a product of a better quality (thus of greater aggregate value), but is merely cutting down production as it is. Since energy is extractive and geographically specific, you could argue it acts, on a global scale, as a de facto land rent.

      3. Actually, OPEC has increased production, by about 3% in 2021, accounting for almost all the increase in global production. In 2022, the decline in production has been in the OECD, not OPEC, countries. OPEC petroleum production has increased marginally, with total liquid production declining. I really don’t think inflation of oil prices has been driven by OPEC production caps.

  4. Michael, have you seen the latest GPNOW estimates from the Atlanta Fed? The curve of the last few days seems to indicate that we are heading for a new contraction in the third quarter. This would be consistent with the PMI composite data in July and August. Do you think they will continue to deny the recession if in a few weeks the BEA confirms a new contraction? By the way, do you think that the United States has already entered a mild (for now) recession phase? By the way, the bond yield curve is still inverted. 10-1 years: -0.545. 10-2 years: -0.414. 30-1 years: -0.524. 30-2 years: -0.393. It is true that new increases in the policy rate are expected in the short term, but something is indicating.

    1. Well all the factors indicating recession are emerging. A recession is only officially recognised when the wise men (only) at the NBER declare one and that is after the event. Until then, the official view is to deny it and rely on the fact that official unemployment is near all-time lows (a very odd feature of the Long Depression since 2009.
      .

      1. vk,
        I’m not suggesting any of that. GDP data is published by BEA. Who determines the phase of the cycle is NBER. BEA has nothing to do with it, I understand. I mention the Fed because it is the one most interested in denying the recession in order to continue raising rates.
        Michael,
        Well, we all know how the “ultimate authority on business cycles” works, but I was interested to know what you think. Did the United States enter a recession or not?
        Anyway, it also strikes me how American capitalism achieves “full employment” with such low growth rates. This year in fact with zero growth rates at best. Strictly speaking, the explanation is simple: since labor productivity tends to grow at an increasingly slower rate (and at the beginning of this year it had negative growth), even low rates of economic growth allow the “industrial reserve army” to be absorbed. In other words: it would increase the “employment-output elasticity”. The problem is that this “growth model” is limited by the size of the “industrial reserve army”. This is the case that Marx addresses to prove that capitalism always tends to reproduce itself with a relative surplus population: even if we assume that the accumulation of capital increases with a constant technical composition, the reserve army would tend to zero, wages would increase, the rate of surplus value and profitability would fall and, finally, accumulation would collapse, causing unemployment to grow again. Of course, Marx was aware that the relationship between unemployment and wages is not linear and that it is mediated by class struggle. “Neoliberalism” allowed US capital (by smashing the unions) to keep wages low even in a near “full employment” scenario. But while neoliberalism managed to increase the numerator (or the rate of surplus value) it did not reduce the denominator (or the unproductive capital stock), so it never achieved a radical increase in the rate of profit and accumulation at the level of the second post-war.

      2. Yes, the USA is definitely already in a recession. In fact, it is in a worse situation than a recession: it is shrinking (structural crisis of capital; descendant/negative historic phase of capitalism).

        Present-day bourgeois economics share a conspiracy theory which states that the free market has a “psychology”. According to this theory, if “panic” and/or “pessimism” is incited on the free market, the free market – therefore, the whole economy – will necessarily fall, regardless of the situation on the field. Reversely, if “optimism” and/or “euphoria” are incited on the free market, it will necessarily go up, regardless of the situation on the field.

        That’s why those big institutions like the IMF, WB, Fed etc. etc. never predict a recession for the USA (which is the capitalist version of the Soviet Union; it must stand in order for capitalism to stand, therefore is the only nation not allowed to fail), and, when they do, only post facto. And, when the recession is too obvious to deny, they always predict some variation of an immediate recovery (“V-shaped” recovery) for the following year.

        Employment, as used by bourgeois economics (and here I’m including the BEA et al), is a very subjective definition. With the proliferation of the so-called “gig economy”, it has become almost impossible for an American to be considered unemployment per official definition. You could work for two hours the last two months and be considered “employed” by the BEA. For Marxism, the important factor is variable capital and all of its subjective relations – that’s where you find the true situation of a capitalist system.

  5. Of course profit is the driving force of capitalism. It is clear that tendency of rate of profit to fall still now is perhaps dominant. As such the result is crisis. But why the countervailing tendency fails to act in the opposite direction? There is a downward tendency of wages. There is a tendency of cheapening of machine, raw materials. Moreover turnover time is shortening as compared to previous days. All this fails to counteract. As such I want know your opinion in this regard.

    1. Bitan I am glad that you agree profit is the driving force of capitalism and Marx’s law of profitability explains the regular recurring crises of production and investment in capitalist economies. But this is a minority view not only among mainstream economists but among heterodox post-Keynesians and even most Marxists! So your ‘of course’ requires convincing theoretical and empirical backing. If the rate of profit is falling on a sustained basis over a period of years, that tells you that the countervailing factors are not sufficient to stop the determining tendency. There are periods when they are as between 1982 and 1997, and periods when they are not, as between 1997 and 2007. Since the end of the Great Recession, the average profit rate in the major economies has not got back to that of late 20th century or even back to 2006. This explains the Long Depression that I wrote a book about.

    2. Well, they fail to act in the opposite direction by definition. If they could really reverse the tendency of the profit rate to fall, they would not be called “countervailing”.

      The reason the “tendency of cheapening of machine, raw materials. Moreover turnover time is shortening as compared to previous days” “fails to counteract” is very simple: they’re not counteracting factors, but factors of the TPRF, since they all rise, not lower, the OCC. The philosophic explanation for that is all of these can only get cheaper when socially necessary labor time lowers; or, on the reverse, the cheapening of machinery, raw materials and the shortening of turnover are the symptom of the fall of socially necessary labor time.

      1. Then what is the reason of boom and bust? What is the reason of rise and fall of rate of profit? Of course in the next cycle rate of profit does not rise to the extent of earlier cycle. Even then there is a rise. Is it only because of the fact that after each crisis wages are lowered.

        On Sat, 17 Sep 2022, 11:57 pm Michael Roberts Blog, < comment-reply@wordpress.com> wrote:

        vk commented: “Well, they fail to act in the opposite direction by > definition. If they could really reverse the tendency of the profit rate to > fall, they would not be called “countervailing”. The reason the “tendency > of cheapening of machine, raw materials. Moreover ” >

      2. But then the question is why the crisis is periodic in nature. Why after every crisis there is a boom. Of course with the passage of time crisis becomes longer and the period of boom becomes shorter and the peak of the rate of profit in the new cycle is lower than the previous peak. But why does a period of boom comes after each crisis? Is it only because of the tendency of wages to be lower at the time of crisis?

        Apart from this with the technological development there is tendency of the rate of surplus value to rise. Thus with the technological change there is rise of dead labor and as a result there is a tendency of rate of profit to fall. On the other hand with the rise of dead labor and technological change, rate of surplus value increases and total surplus time for production increases. Both these tendencies are to be taken into account. I accept that both these countervailing tendencies as mentioned by Marx in Volume III of capital are weak as compared to the dominant tendency of rate of profit to fall. But if there is no countervailing tendency then the question of periodic boom cannot be explained.

        On Sat, Sep 17, 2022 at 11:57 PM Michael Roberts Blog < comment-reply@wordpress.com> wrote:

        vk commented: “Well, they fail to act in the opposite direction by > definition. If they could really reverse the tendency of the profit rate to > fall, they would not be called “countervailing”. The reason the “tendency > of cheapening of machine, raw materials. Moreover ” >

      3. In the cases you posit, we have, essentially, two scenarios:

        1) a new, revolutionary technology emerges, thus enabling capitalism to initiate a new Kondratiev Cycle;

        2) capitalism is operating under its normal cycles, without any structural factor weighing in.

        In the first case, the new technology rises labor productivity so much relative to its OCC that the TPRF is halted for a long period of time. In such situation, the old technology, therefore the old fixed capital, is entirely and immediately substituted by the new. This new fixed capital is put into motion, wearing down gradually, restarting the TPRF, which then proceeds as before – except for the fact the OCC is now higher than ever.

        In the second case, the chaining of many cycles within capitalism proceed, leading to the overall, until the overall existing fixed capital is depleted. When the cycle of fixed capital needs to be entirely (socially) restarted, i.e. when new investment on a mass scale is necessary in order for capital to continue to rotate, such investment will have to be made against a relatively depressed social profit rate. In this case, either capital does #1 – in which case, this is not curse, but a blessing for the capitalists (even if momentary) – or, as we’re in case #2, the same old technology must be rebuilt. Proceeding with this, we have that the old technology already has a known rate of surplus rate, which will then lower the profit rate, since the OCC will be higher (because the fixed capital will be brand new). From this we have that, since the surplus value rate is constant, the only possible scenario to change that is through an increase of the rate of absolute extraction of surplus value (i.e. worsening conditions for the working class relative to the previous rotation of fixed capital).

        The intermediary case of #2 is when the capitalist class ameliorate the already existing technology, by making it more efficient, combining with an increase of the rate of extraction of the absolute surplus value. In this case, the tendency of #2 is simply slowed down, because even increases of efficiency of already existing technology increases the OCC, which then reignites the process of the TPRF.

        Now, let’s give wings to our most perverse human feelings and imagine a complete dystopian scenario: the capitalist class decides to undevelop the productive forces, that is, reverse the course of History entirely. In such scenario, capital would have to be destroyed without any reposition. But capital is the only source of profit for the capitalist class, whose social condition of capitalist class depends solely on the existence and hegemony of capital. Without capital, there is no capitalist class. With less capital, the capitalist class is weaker, not stronger. In such scenario, either this process serves only as a latency historical period for a complete and irreversible communist revolution (philosophically, we call this the “positive” scenario) or humanity goes back to a pre-capitalist mode of production (it doesn’t matter here if it is a post-apocalyptic version or not, those moral judgments are irrelevant to science). Either way, capitalism ceases to exist, thus confirming the validity of the TPRF.

      4. “It doesn’t matter here if it is a post-apocalyptic version or not, these moral judgements are irrelevant to science….”

        VK, incorporating historical events for our understanding of any social order–for example, in the present state of capitalism, including war, imperial rent, and actual theft of countries’ assets as exemplified by US behavior since it established its post WW2 “empire of bases” first strike threat of nuclear obliteration –is being more “scientific” and marxian than ignoring history.

        Such actual historical conditions are only seemingly exogenous to a “scientific” understanding of capitalist mode of production. Marx’s injection of the the dialectical concept of surplus value was and still is “exogenous” to the bourgois mind’s asocial, purely numerical, understanding of what profit is. The mode of production and the particular social order it must reproduce relate dialectically to one another., espcially in the creation of a succeeding social order.

        I salute you for sticking to the topic of this blog, but you went too far and off topic in projecting your scenarios…as comforting as these head in the sand, “scientific” scenarios are.

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