Manufacturing Profits Tell the Real Story

by: Mark J. Perry

Mike Mandel has a post "New Manufacturing Data Show Weaker Factory Recovery, Deeper Recession," where he presents some new Census data on factory shipments of manufactured goods through the first quarter of 2011. Mike concludes that "real shipments are still 15% below their peak, and asks "Now that hardly looks like a recovery at all, does it?"
But Census also reported recently on U.S. manufacturing profits (see CD post here), and those data show that real manufacturing profits have completely recovered from the recession, and reached an all-time high in the fourth quarter of last year (see chart above, adjustment for inflation made using theBusiness Sector Deflator). Fourth quarter 2010 profits of $135.5 billion were 10% above the pre-recession level of $122.9 billion in the fourth quarter of 2007.
Bottom Line: Due to cost savings, improved productivity and increased efficiencies achieved during the last three years, U.S. manufacturing corporations are now more profitable than ever before, and that's part of the reason for all of the "happy talk." In the end, it's profitability that's the most important gauge for the health of a company or industry, not the amount of shipments, output, or employment levels.

For the manufacturing sector to have record-high profits today at a level of output 15% below the peak in 2007 is much better than the reverse - a record level of output with profits 15% below a 2007 peak. With record-high profits, American manufacturing corporations have the resources to make the very investments in research, technology and capital equipment that will allow them to become even more efficient, productive and profitable in the future. U.S. manufacturing's best days lie ahead.