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Home Publications Blogs Beat the Press Big Drop in Profit Share in First Quarter GDP

Big Drop in Profit Share in First Quarter GDP

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Tuesday, 01 July 2014 13:24

Quarterly GDP data are erratic and profit data in particular are subject to large revisions, but hey it's still worth noting a big drop in profit shares reported for the first quarter of 2014. The data released by the Commerce Department last week showed the profit share falling from just over 21 percent of net value added in the corporate sector in the last quarter of 2013 to less than 19 percent in the first quarter of 2014. Here's the picture.

corporate profits

It's too early to make much of this drop in profit shares. It is also a bit disconcerting that it is all attributable to a drop in the capital consumption adjustment, the difference between accounting depreciation and economic depreciation as measured by the Commerce Department. (In other words, the Commerce Department is showing a larger gap between what firms record for accounting purposes and the actual rate of depreciation of capital.)

Anyhow, with all the appropriate caveats, this may be the first sign that the sharp rise in profit shares in this century is being reversed, or as Gerald Ford once said, our long national nightmare is over.

Comments (11)Add Comment
...
written by ltr, July 01, 2014 6:05
I use FRED2 all the time, but could not generate this graph. Please help, I have no idea what I am doing wrong in this case.

Also, I do not understand this point:

It is also a bit disconcerting that it is all attributable to a drop in the capital consumption adjustment, the difference between accounting depreciation and economic depreciation as measured by the Commerce Department. (In other words, the Commerce Department is showing a larger gap between what firms record for accounting purposes and the actual rate of depreciation of capital.)
...
written by ltr, July 01, 2014 7:11
I cannot find "net value added of corporate business."

Darn, why?
finding net value added
written by Dean, July 01, 2014 9:50
It's series #A439RC1Q027SBEA
I pull out depreciation to get a clearer picture of the split -- ideally I would pull out indirect business taxes, but that is small.
mechanisms, theory, and history
written by Peter K., July 02, 2014 8:18
As an amateur I am curious as to what is the theory behind what is happening in the economy at this moment regarding profit shares and does economic history back this up?

Is Dean being slightly facetious?

Is it simply that the labor market is tightening and labor is gaining shares? If this were the case would there be other economic indicators supporting it? Would competition cut into profits (but not profit share)?

I take it from Dean's desire to pull out taxes, anything the government does to effect profits is pulled out to get a better picture.

Does this relate to the Piketty debate in a tangential way?
...
written by ltr, July 02, 2014 9:21
Thank you for explaining, Dean Baker.
Hold the Line on Wages!
written by Ellis, July 02, 2014 12:25
Thanks for pointing out the slight drop in profits, although it is a bit too technical for my small brain. Does that mean business's cash horde of three or four trillion dollars is getting larger at a slightly slower rate?

No matter, it's time to cut wages and benefits -- that's for sure.
Also don't quite understand
written by good2go, July 02, 2014 12:54
Could you please follow up with an explanation of the ramifications? Or anyone, for that matter. Thanks.
can't attach much meaning to profit share drop
written by Dean, July 02, 2014 3:53
Ideally the drop in profit shares would mean that workers are getting a share of the gains from growth, meaning higher wages. But, the data for the first quarter show the economy shrinking, which means there were no gains to be shared. So we really can't draw much from this picture yet. However, if the profit share stays down and we get decent growth the rest of this year, that would mean that workers will finally be seeing some wage growth.
thanks
written by Peter K., July 02, 2014 6:15
makes sense, muchos gracias
...
written by ltr, July 02, 2014 7:18
Thanks again for the really helpful comment, Dean Baker. I read all your posts and any following comments and always learn.
Or....
written by reason, July 08, 2014 3:20
Looking back at the history, couldn't this just be the first sign of an approaching recession. The previous two recessions were preceeded by a drop in profit share. (Of course it may depend on what was driving this. If it was accelerating wages tipping the Fed's hand then maybe this won't repeat now.)

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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