Corporate profits

The relationship between corporate profits and US GDP growth appears to have come to an end

by GC Mays

The Bureau of Economic Analysis reported that second-quarter GDP grew at a dismal annualized rate of 1.3%. The three quarters leading up to this one have been revised with Q1 GDP growth revised down from an already weak 1.9% to a morbid annual rate of 0.4.

click on graphics to enlarge

Source: The Mays Report

Despite anemic GDP data, about 83% of S&P 500 companies beat analyst estimates for the second quarter of 2011 according to data compiled by Bloomberg and many reported record revenues and profits. What we see here is that the fortunes of the largest US-based corporations are decoupled from the domestic economy.

Standard and Poors recently reported that in 2010, 46.3% of all sales by S&P 500 companies came from outside the United States. This is mainly due to the growth of the middle class in emerging and developing markets. Ironically, the growth of the middle class in these markets is due to the fact that S&P 500 companies increasingly view labor as a global commodity and use lower-cost labor from around the world, including markets emerging from Asia and South America. This increases revenue and consumption in the respective foreign countries, thereby supporting increased sales.

These structural changes led to stagnant domestic employment while corporate profits rose above their pre-recession highs.

Corporate profits as a percentage of real GDPData source: Bureau of Economic Analysis; Chart: The Mays Report

If we look at the past 10 years, the divergence between S&P 500 corporate earnings and national GDP growth is astounding. Between the first quarter of 2001 and 2006, a simple correlation showed that corporate profits explained 98.4% of domestic GDP growth. However, over the past five years from the first quarter of 2006, the correlation between corporate profits and domestic GDP growth breaks down when corporate profits explain only 10.1% of domestic GDP growth.

Despite a severe financial crisis that nearly brought our banking system to its knees, corporate America rebounded with new all-time highs in revenue and profits, while domestic unemployment remains at levels not seen since the July 1981-November recession. 1982. For the past decade, American citizens have been asked to sacrifice their privacy, income, and even their lives for the sake of this great country. American companies have made record profits, but seem to have lost all sense of national purpose. A nation cannot be great without its citizens having gainful employment. Hire American.

Disclosure: I have no positions in the stocks mentioned and do not plan to initiate any positions in the next 72 hours.