Corporate Profits Soar Higher

It might be odd with the U.S. recovery not recognized by many, but U.S. businesses continue to surge forward as described in November 23rd, 2010 NY Times article written by Catherine Rampell.  At the end of the third quarter of 2010, U.S. corporate profits rose to $1.659 trillion which is the highest recorded figure in over 60 years.  Even though it is not adjusted by inflation, that is certainly a healthy figure.  One might ask how that can occur given economic conditions in the U.S.  The explanation lies in higher productivity rates and globalization.

First, corporate performance is directly related to productivity.  If firms can produce a good at a faster rate of time, then that can lower their overall costs and lead them to gaining more market share because they can be more competitive on price.  Even with a downsized workforce, investments in technology have paid off for firms.  That means that can maintain production levels with less workers.  That is one of the reasons why the U.S. is transitioning from manufacturing to service-oriented jobs, so U.S. workers must improve their human capital and technology skills to become more marketable and attain higher paying service jobs.

One other aspect that led to the quick recovery of U.S. firms during the last recession is the U.S. economic system.  When looking at the U.S. economic profile from the Heritage Foundation's Index of Economic Freedom, you will see that they score very high in labor freedom at 94.6 out of 100.  This means that there are very few costs in firing an employee.  Therefore when the economy deteriorated, businesses were able to layoff workers quickly to improve their bottom line.  This is in contrast to European countries, who impose high costs on firms who want to fire workers.  For instance, Germany's labor freedom index score rates at a low 39.9.  While this is obviously good for European workers, European firms were slower in recovering as reflected in this March 18th, 2010 Economist article comparing U.S. and Europe productivity rates.  When looking at 2009, you can see that U.S. firms still had positive productivity rates at 2.5% rise in GDP per hour, while Europe had a -1.1% decrease in GDP per hour.  It should be noted that European countries have since rebounded, though.

Another factor is that the U.S. has capitalized on globalization.  Even though the U.S. economy tanked, many U.S. multinational corporations were able to offset their domestic losses by taking advantage of higher growth in developing countries, such as China, Brazil, and India.  In addition to being able to market their products and services in these new markets, they were also able to outsource production overseas.  This improved their cost structure and enabled them to boost their profits. 

While many Americans are discouraged by oursourcing and the loss of jobs, there are hidden benefits that many do not see.  In the Fruits of Free Trade produced in the 2002 Annual Report of the Federal Reserve Bank of Dallas, we can see how we capitalize from freer markets.  It is outdated because it shows the U.S. as the world's greatest exporter, but we have since been taken over by Germany and China.  However, the U.S. consumer is better off due to the cheaper imports entering the marketplace.  While it is true that free trade destroys jobs, there is an economic concept called creative destruction where inefficient firms are replaced by more efficient producers.  In fact before the recession, more jobs were being created than destroyed.  The problem is that these new jobs require different skillsets, so the distribution of these jobs are not always equitable.