Thursday, June 9, 2011

"Corporate profits have soared"

Once again, this is "Corporate Profits After Tax" from FRED:

Graph #1
Let's look at slopes. Well, I'm lazy, so let's imagine some slopes.
A slope is a straight line that suggests the general trend of a wiggly line.
  • In the 1950s, flat.
  • In the 1960s, a slight uptrend.
  • In the '70s, more of an uptrend than the '60s.
  • From about 1985 to 1997, a greater slope than in the '70s.
  • From 2004 to 2006 or so, a steeper increase even than in the '90s.
  • And after the plunge of the recent recession, the slope is almost vertical.
The slope of the line shows continual increase. But once it goes vertical, no further increase is possible.

Before the recent recession, the general trend of corporate profit was one of exponential increase. Like many trends in our economy, it was a result of growth and the passage of time.

If we look not at total corporate profit, but at the quarter-to-quarter change in corporate profit --

Graph #2
-- exponential increase is still visible. Later spikes tend to be larger than earlier ones.

But if we look instead at the percent change in quarterly corporate profits, the exponential effect is gone:

Graph #3

What we see instead is a scattered, seemingly random pattern of up- and down-spikes. The largest, indeed, do occur during the most recent recession. Those recent spikes, however, reflect not soaring profit but rather the severity of that recession, as well as the strength of the policy reaction to it -- a necessary reaction, certainly.

And, granted, there are two up-spikes close together in the decade of the mid-2000s. This corresponds to the anomalous increase in other graphs of corporate profits.

That said, the seemingly random pattern of Graph #3 cannot be completely random; for as yesterday's graph shows, there was a general downtrend in the profit rate until 1982, and a general uptrend since.

Yesterday's graph