The Bureau of Economic Analysis creates literally thousands of different data series, most of which are reported on the National Income and Product Accounts tables. One of these is Corporate Profits. The BEA released its 2nd quarter preliminary corporate profits estimates, along with the second revision of 2nd quarter GDP (these are generally released about 55 days after the close of the quarter). Revised quarterly estimates are released about 85 days after the quarter.
The BEA reports corporate profits using a number of definitions: Profits from current production is derived as the sum of profits before tax (what are often called “book profits”) adjudted by changes in inventory valuation and capital consumption; Book Profits which is corporate income regardless of any redistribution of income made through taxes; and After-Tax Profits, which are book profits with taxes taken out. These definitions are very different that those used by most businesses, and differ from accounting profits that are reported in company annual reports.
Preliminary estimates for the 2nd quarter of 2013 show that profits from current production increased by $78.3 billion in the second quarter, following a 1st quarter decrease of $26.6 billion. Taxes on corporate income increased $10.5 billion in the 2nd quarter, in contrast to a decrease of $25.0 billion. Dividend payments also increased substantially in the 2nd quarter, but this was largely due to dividends paid by Fannie Mae to the federal government. Partly because of this, the internal funds available to corporations for investment decreased $194.6 billion, in contrast to an increase of $140.7 billion in the 1st quarter.
Corporate profits represent the funds that businesses have to either invest or to pay out to shareholders. Increasing profits generally leads to either increased corporate investment in new plant and equipment or in increased dividend payments to shareholders. This is generally good for the economy since profits represent what is left to companies after taxes and wages are paid. On the other hand, decreasing profits indicate that the economy is weak and that companies do not have “pricing power.” This is particularly true in periods where input prices (generally commodity prices) are rising.
The 2nd quarter profit numbers are among the best that have come out over the past couple of years. Profits were down significantly in the 1st quarter, following a seesaw pattern over the past three quarters. Overall, profits for both financial and non-financial firms were up and as details come up with the next revision it is expected that this will be fairly broad-based across industries. Particularly coming off very poor years in 2011 and 2010, this is a good sign that at least the corporate sector is recovering from the recession. As profits rise, there is more incentive to invest in new plant and equipment and this will lead to future job and earnings growth. That said, the recovery is fragile, like a river that is wide but not deep. While many sectors may be seeing improvement, it will not take much to dry the entire river. Businesses should continue to be wary about medium term investments, although the current low interest rate environment and existing slack in supplier sectors may suggest that longer term investments may be practical.