Corporate Profits Are Peaking

Bob Johnson: This week's chart compares corporate profits with overall economic activity. The number has been highly volatile, ranging from about 3% to as much as 7%. Right now, we are running at about 7.3%, an all-time record high. Over time, the series has been trending up a little bit, but it always tends to come back down again, and it often comes down in a recession and is cyclically related. 

But at the moment, the number is doing particularly well. There have been some tailwinds. We've had low taxes. We've had low capital expenditures. We've had low interest rates. And corporations have skimped a bit on their [selling, general, and administrative] expenses. All of those things have really helped this [number] and helped it set a new record high. That's the good news. 

The bad news, looking forward, is that the trends aren't good. If you look at interest rates, the Federal Reserve is considering raising them--that will impact interest expense. Certainly, with tax policies around the world, people want to tighten down on all the tax havens and potentially change the rate systems around the world. Certainly, taxes won't be the big boon they've been the last couple of years. And certainly, corporations haven't had to expend much on capital lately--capital expenditures. The reason being that we had so much overcapacity. 

That's changing. They'll have to add more in the months and years ahead, also potentially bringing in that margin. And I think over time people are going to have to spend more on SG&A, on marketing expenses, and on R&D if they want to ever hope to grow revenues again. 

So, for all of those reasons, I think we're probably at an all-time high right now. But over the next one, two, or three years, that number will begin to decline.