June 05, 2002
Profits and Productivity

In the 1990s profits, as measured by the national income accountants, peaked in 1997. Thereafter--even as productivity and production in the entire economy grew more rapidly than they had in a quarter-century--profits fell. The benefits of the wave of innovation in information technology and economic growth in the last years of the twentieth century flowed not to corporations' shareholders but to consumers in the form of lower prices and to workers in the form of high wages and salaries. There had been a debate about whether the coming of information technology would subject American businesses to more competition, as better information technology made it easier to comparison shop, or subject to less competition, as first movers exploited economies of scale and scope to acquire entrenched monopoly positions. The answer, of course, is "both"--America is a big place where lots of things can happen. But it seems clear that the first happened more than the second: that the late 1990s saw a profit squeeze as the benefits of economic growth went overwhelmingly to workers and consumers.

The joker was that America's businesses did not tell their investors that profits had peaked in 1997. By 2000 the S&P 500 firms were reporting operating profits 50% higher than in 1997. The stock market today seems to be on a general downward trend. I think this downward trend is because investors are hearing more bad news about how true profits are and have been lower than they had beleived than they are hearing good news about the unexpectedly-rapid recovery from last year's recession.

I'm Brad DeLong.

Source: Economist.
Posted by DeLong at June 05, 2002 11:44 AM

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I just saw the last quarter's productivity figures -- an annualized rate of 8.4% -- and wondered if you could pull it apart like you did for the last quarter's GDP numbers.

8.4%/year seems really, really big, and I'm wondering where that kind of change can come from.

Posted by: Neel Krishnaswami on June 5, 2002 06:26 PM

Regarding S&P500 profits from 1996-2002:

For most of this period, I think that what you're picking up is massive consolidation in the financial, oils and pharmaceuticals sectors rather than anything more sinister in terms of financial reporting. Unless the Economist carried out some tricky adjustments to the underlying data, you've got to remember that for the purposes of this chart it counts as an increase in S&P500 profits if two S&P500 companies merge and another company is brought into the index.

Posted by: Daniel Davies on June 5, 2002 11:46 PM

I assumed that the relative earnings numbers were corrected for mergers--but let me find out...

Posted by: Brad DeLong on June 13, 2002 08:33 PM
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