Corporate Profits: Biggest Growth Outside U.S.

by: Chris Ridder, CFA

This week I was researching U.S. Government data for corporate profits. The data can be found on the BEA website. I looked at the "peak" year in corporate profits prior to the 2008 financial crisis.

The year was 2006, two years before the financial crisis. Housing was booming. Sub-prime loans were thought to "help" people, according to most politicians. CDOs would provide "AAA" high yields to investors. And fixed income hedge funds were "hip" and their managers the next "masters of the universe."

Then things changed in 2008. However, I will digress and not explain why but simply move on to what happened to corporate profits over the business cycle. Looking from 2006 - 2011 corporate profits grew by about $219 Billion. However, most of this growth came from outside of the U.S., around $182 Billion. U.S. domestic industries grew by only $36.6 Billion.

Now the U.S. growth figure might seem okay, at least it was not negative. But that figure of $36.6 Billion includes a positive contribution of 42.1 Billion from "Federal Reserve banks" (line 11). This was over 17.5% annualized growth. All other domestic U.S. industries when aggregated together had a slight negative growth in profits from 2006 until 2012.

Source: BEA (see link above)

Today, one hears bulls saying not to worry about Europe or China. The U.S. will still be able to grow profits. However, after looking at the data from 2006 - 2011, where "Rest of the world" (line 5) had profit growth of 11.3% a year vs. the .5% growth for "Domestic industries" (line 2), I am still skeptical. Granted the "Nonfinancial" (line 4) industries had better growth of 1.7%. However, the bottom line, of the short past, is that U.S. corporations need profit growth from outside the U.S. economy.

US stock investors need to be aware of economic trends and policies overseas. Traders, investors, and strategists need to be reading not just the WSJ but also the Financial Times, so to speak. Hopefully most readers already are. Now, if only the FED would IPO itself and let investors get that 17+% growth!

P.S. For those wondering my tongue was indeed in my cheek in the previous sentence.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.