Recent Trends – Corporate Profit

In 2007, corporate profit declined for the first time since the 2001 recession. Corporate profit continued shrinking in 2008, led by large losses at financial companies stemming from mortgage defaults. Nonfinancial companies also suffered in 2007 and 2008 because of the slowdown in domestic demand. Softer domestic demand resulted from a fall in house prices and stock prices, fears about unemployment, high labor costs and high energy and commodity costs. Companies tried to offset these factors by reducing their staff levels.

Business performance worsened through mid-2009 as unrelenting unemployment depressed demand for goods and services. During this period, the seizing up of international trade and credit markets amplified the depth of the downturn. Fortunately, profitability showed its first signs of improvement later in the year. Businesses cut costs, including wages and selling, and general and administrative expenses, which aided profit and offset falling revenue. Cutting deeply into its payrolls, corporations squeezed more productivity from fewer workers in 2010. Additionally, US-based multinationals benefited from a weak US dollar and stronger growth overseas to record particularly strong growth of 24.7% in 2010, nearly recovering to 2006 corporate profit levels. Growth in corporate profit started cooling off in 2011 after this substantial growth. Commodity prices, which were low during the recession, jumped back up, meeting or exceeding their pre-recessionary highs. In addition, persisting high unemployment has prevented consumption, and therefore demand for businesses, from rebounding quickly. However, the strong performance of the capital markets and strong export growth led to a substantial increase in corporate profit in 2012. Concerns associated with budget sequestration and a potential global slowdown led to corporate profit declining 3.8% in 2015.

Investment incentives that enabled companies to accelerate depreciation rates, such as capital consumption adjustments, expired in 2014. Consequently, companies incurred less depreciation for tax purposes, leading to a plunge in the corporate profit figure in the first quarter of 2014, which led to the slowest growth in the variable since a drastic fall in 2008. In 2015, all major oil companies in the world, including US-based companies, took a drastic hit due to the fall in the price of crude oil. Additionally, the appreciation of the US dollar reduced the dollar-denominated profit of US companies. Consequently, corporate profit declined by 3.8% in 2015, with an additional decline of 2.1% in 2016. In 2017 and 2018, broad economic improvements led to rises in domestic demand for US corporations, resulting in positive performance in the domestic economy. Trade tensions began to weigh on the private sector though, as corporate profit showed signs of stagnation in 2019. In 2020, corporations were strained to an even greater degree, as the COVID-19 (coronavirus) pandemic impacted supply chains significantly and weighed on aggregate demand, causing a global slowdown in activity. Corporations, particularly larger ones, were resilient to the upheaval and performed better than initially feared, with corporate profit declining 6.4% in 2020. In 2021, corporate profit is expected to rebound by 21.8% as economic activity returns, with performance improving as the year progresses.