US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. November 6, 2014 Dr. Edward Yardeni 516-972-7683 [email protected] Debbie Johnson 480-664-1333 [email protected] Please visit our sites at www.yardeni.com blog.yardeni.com thinking outside the box Table Of Contents Table Of Contents Profits Profits (NIPA) Profits (NIPA vs. S&P) Retained Earnings & Dividends Cash Flow Profit Margin November 6, 2014 / US Economic Indicators: Corporate Profits in GDP 1-2 3-8 9 10 11 12-13 Yardeni Research, Inc. www.yardeni.com Profits Figure 1. 6375 5675 4975 4275 3575 6375 5675 4975 4275 3575 NOMINAL GDP & AFTER-TAX CORPORATE PROFITS Q2 (1960=100, ratio scale) 2875 2875 2175 2175 1475 1475 775 775 7% Growth Path* Nominal GDP After-Tax Corporate Profits Reported to IRS From Current Production** yardeni.com 75 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 75 18 * Compounded monthly to yield 7% annually. ** Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 2. 183 153 123 183 153 S&P 500 EARNINGS PER SHARE (dollars, ratio scale) Oct Q2 93 123 93 7% S&P 500 Earnings Per Share* 63 63 Reported (4-quarter sum) Operating** (4-quarter sum) 33 33 Forward*** 5% yardeni.com 3 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 3 18 * Growth paths are compounded monthly to yield 5% and 7% annually. ** Excludes write-offs. *** 52-week forward consensus expected S&P 500 operating earnings per share. Time-weighted average of consensus earnings estimates for current and next year. Source: Standard & Poor’s Corporation and Thomson Reuters I/B/E/S. Page 1 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits Figure 3. 6375 5675 4975 4275 3575 6375 5675 4975 4275 3575 NOMINAL GDP & AFTER-TAX CORPORATE PROFITS Q2 (1960=100, ratio scale) 2875 2875 2175 2175 1475 1475 775 775 7% Growth Path* After-Tax Corporate Profits Reported to IRS From Current Production** yardeni.com 75 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 75 18 * Compounded monthly to yield 7% annually. ** Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 4. 220 190 160 220 190 S&P 500 FORWARD EARNINGS* (ratio scale) 160 130 100 10/30 7% growth rate** 130 100 70 70 40 40 yardeni.com 10 10 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 * 52-week forward consensus expected S&P 500 operating earnings per share. Monthly through April 1994, then weekly. ** Compounded monthly to yield 7% annually. Shaded areas denote recessions according to the National Bureau of Economic Research. Source: Thomson Reuters I/B/E/S. Page 2 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 5. 2810 2410 2010 1610 CORPORATE PROFITS FROM CURRENT PRODUCTION* (billion dollars, saar, ratio scale) Q2 2810 2410 2010 1610 1210 1210 810 810 Total Profits 410 410 Pre-Tax After-Tax yardeni.com 10 10 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 6. 3010 2510 2010 CORPORATE PROFITS REPORTED TO IRS* Q2 (billion dollars, saar, ratio scale) 1510 3010 2510 2010 1510 1010 1010 Total Profits 510 Pre-Tax 510 After-Tax yardeni.com 10 10 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Excluding Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Page 3 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 7. 100 100 CORPORATE PROFITS FROM CURRENT PRODUCTION* (yearly percent change) Total Profits After-Tax (-8.9) 50 50 0 0 Q2 yardeni.com -50 -50 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 8. 150 150 CORPORATE PROFITS REPORTED TO IRS* (yearly percent change) 100 100 Total Profits After-Tax 50 50 Q2 0 yardeni.com -50 0 -50 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Excluding Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Page 4 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 9. 1400 1400 CORPORATE PROFITS BY INDUSTRY* (billion dollars, saar) Q2 1200 1200 Pre-Tax By Industry 1000 1000 Nonfinancial Financial 800 800 Net Receipts from the Rest of the World 600 600 400 400 200 200 0 0 yardeni.com -200 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 -200 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 10. 100 100 CORPORATE PROFITS BY INDUSTRY* (as a percent of corporate profits) 80 80 60 60 Q2 Pre-Tax By Industry Nonfinancial 40 40 Financial Net Receipts from the Rest of the World 20 20 0 0 yardeni.com -20 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 -20 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Page 5 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 11. 550 500 550 MEASURES OF PROFITS IN FINANCIAL SECTOR (billion dollars) 450 500 Q2 Pre-Tax Profits: Financial* (saar) 400 450 400 S&P 500 Financials 12-month Forward Earnings 350 300 350 300 FDIC Commercial Banks: Net Income (annualized, nsa) 250 250 200 200 Dec 150 150 Q2 100 100 50 50 0 0 -50 -50 -100 -150 -100 yardeni.com -150 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: Bureau of Economic Analysis and Federal Deposit Insurance Corporation, Quarterly Banking Profile. Figure 12. 40 40 FINANCIAL PROFITS SHARE OF TOTAL PROFITS 35 35 30 30 25 25 Q2 20 20 Dec 15 10 15 Financial Profits as a Percent of Pre-Tax Corporate Profits 10 S&P 500 Forward Earnings* 5 5 0 0 -5 -5 -10 -10 yardeni.com -15 -15 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 * Using consensus 12-month forward earnings forecasts. Source: US Department of Commerce, Bureau of Economic Analysis and Thomson Reuters I/B/E/S. Page 6 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 13. 750 700 750 CORPORATE PRE-TAX PROFITS FROM THE REST OF THE WORLD* 700 (billion dollars, saar) Q2 650 650 600 600 Rest of world profits 550 550 Net 500 500 Receipts 450 450 Payments 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 yardeni.com -50 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 -50 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 14. 60 55 60 CORPORATE PRE-TAX PROFITS FROM THE REST OF THE WORLD (as a percent of pre-tax corporate profits*) 55 Rest of world profits 50 50 Net 45 45 Receipts 40 40 Payments 35 35 30 30 25 25 20 20 Q2 15 15 10 10 5 5 0 0 yardeni.com -5 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 -5 18 * Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Page 7 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA) Figure 15. 50 40 15 CORPORATE PRE-TAX PROFITS RECEIPTS FROM REST OF WORLD vs. GLOBAL INDUSTRIAL PRODUCTION 10 (yearly percent change) 30 5 20 Jul 0 10 Q2 0 -5 -10 Receipts* -10 -20 OECD Industrial Production -15 -30 -40 -20 95 50 40 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 50 CORPORATE PRE-TAX PROFITS RECEIPTS FROM REST OF WORLD vs. US MERCHANDISE EXPORTS 40 (yearly percent change) 30 30 20 20 10 10 Sep 0 0 -10 -10 Receipts* -20 -20 Exports -30 -30 -40 -40 95 80 70 60 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 -70 -80 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 30 CORPORATE PRE-TAX PROFITS RECEIPTS FROM REST OF WORLD vs. TRADE WEIGHTED DOLLAR (yearly percent change) 20 ROW Profits Receipts* 10 Oct 0 -10 Trade Weighted Dollar (inverted scale) -20 yardeni.com 95 96 97 -30 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 *Including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj), which restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: Bureau of Economic Analysis and Board of Governors of the Federal Reserve System, Census Bureau and OECD. Page 8 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profits (NIPA vs. S&P) Figure 16. 2000 1800 2000 CORPORATE PROFITS IN GDP & S&P 500* Q2 (billion dollars) 1800 1600 1600 NIPA After-Tax Profits (saar) 1400 1400 Based on Tax Returns* 1200 1200 From Current Production** 1000 1000 Q2 800 800 600 600 400 400 200 200 0 0 S&P 500 Net Income (Actual*4) -200 -400 -400 Operating -600 -600 Reported -800 -1000 -200 -800 yardeni.com 95 96 97 -1000 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 * Excluding IVA & CCadj. ** Including IVA & CCadj. These two adjustments restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis, and Standard & Poor’s Corporation. Figure 17. 35 30 35 S&P 500 OPERATING VS REPORTED EARNINGS PER SHARE (dollars) 30 Q2 Q2 25 25 20 20 15 15 10 10 5 5 0 0 Operating -5 -5 Reported -10 -10 -15 -15 -20 -20 yardeni.com -25 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 -25 16 Source: Standard & Poor’s Corporation. Page 9 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Retained Earnings & Dividends Figure 18. 1000 1000 UNDISTRIBUTED CORPORATE PROFITS WITH IVA & CCAdj (billion dollars, saar) 800 800 600 600 Q2 400 400 200 200 yardeni.com 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 0 18 Source: Bureau of Economic Analysis. Figure 19. 1200 1200 DIVIDENDS WITH IVA & CCAdj (billion dollars, saar) 1000 1000 Q3 800 800 600 600 400 400 200 200 yardeni.com 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 0 18 Source: Bureau of Economic Analysis. Page 10 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Cash Flow Figure 20. 2820 2420 2020 1620 2820 2420 2020 1620 CORPORATE CASH FLOW Q2 (ratio scale, billion dollars, saar) 1220 1220 820 820 420 420 Corporate Cash Flow* (2046.4) Economic Depreciation** (1465.4) Tax-Reported Depreciation*** (1135.0) yardeni.com 20 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 20 18 * After-tax retained earnings plus tax-reported depreciation. ** Corporate capital consumption allowances. *** Corporate capital consumption allowances with capital consumption adjustment. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 21. 200 150 200 INVENTORY VALUATION ADJUSTMENT* 150 (billion dollars, saar) 100 100 50 50 0 0 Q2 -50 -50 -100 -100 -150 -150 -200 -200 -250 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 -350 -400 -250 250 200 150 100 50 0 -50 -100 -150 -200 -250 -300 -350 -400 CAPITAL CONSUMPTION ADJUSTMENT* Tax-Reported > Economic Depreciation (billion dollars, saar) Tax-Reported < Economic Depreciation Q3 yardeni.com 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * These two adjustments restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: US Department of Commerce, Bureau of Economic Analysis. Page 11 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profit Margin Figure 22. 16 16 PRE-TAX CORPORATE PROFITS FROM CURRENT PRODUCTION* Q2 14 14 As a percent of National Income As a percent of Nominal GDP 12 12 10 10 8 8 6 6 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * Includes IVA & CCAdj. These two adjustments restate the historical-cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current-cost measures used in GDP. Note: Shaded areas are recessions according to the National Bureau of Economic Research. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 23. 12 12 CORPORATE PROFITS MARGINS IN GDP (after-tax profits as a percent of nominal GDP) Q2 10 10 8 8 6 6 4 4 With IVA and CCAdj* (8.6) Without Adjustments (10.6) yardeni.com 2 2 47 49 51 53 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Note: Shaded areas denote recessions according to the National Bureau of Economic Research. * These two adjustments restate the historical cost basis used in profits tax accounting for inventory withdrawals and depreciation to the current cost measures used in GDP. Source: Bureau of Economic Analysis. Page 12 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Profit Margin Figure 24. 19 19 18 18 PROFIT MARGIN* FROM CURRENT PRODUCTION (percent) 17 17 16 16 Q2 15 15 14 All Corporations 14 13 Nonfinancial Corporations 13 12 12 11 11 Q2 10 10 9 9 8 8 7 7 6 6 5 5 4 4 3 3 yardeni.com 2 2 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 * After-tax profits including Inventory Valuation Adjustment (IVA) and Capital Consumption Adjustment (CCAdj) divided by Gross Value Added of Corporate Business. Note: Shaded areas are recessions according to the National Bureau of Economic Research, which determined that a peak in business activity occurred in the U.S. economy in March 2001. Source: US Department of Commerce, Bureau of Economic Analysis. Figure 25. 16 100 AFTER-TAX PROFIT MARGIN & CAPACITY UTILIZATION After-Tax Nonfinancial Corporate Profit Margin 14 95 Capacity Utilization: All Industries 12 90 Q2 10 8 Sep 85 80 6 75 4 70 yardeni.com 2 65 48 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: Federal Reserve Board and US Department of Commerce, Bureau of Economic Analysis. Page 13 / November 6, 2014 / US Economic Indicators: Corporate Profits in GDP Yardeni Research, Inc. www.yardeni.com Copyright (c) Yardeni Research, Inc. 2014. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. 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