Global Profits View
Andrew Hodge
Global Interdependence Center
November 2, 2006
Why Look at BEA Profits? Fits Profits into the big picture US Profits + Other income = US GDP (roughly). US GDP forecast models (based on BEA data) forecast profits including industry Adjusted for under reporting—includes all private Drives US investment.
Foreign reported separately—only source More reliable and consistent—tax based Seasonally adjusted. Qtrs Lead Wall St YoY
www.bea.gov
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U.S. Economic Accounts 2005 share
100% 90% 80% 70% 60%
Profits 9% Depreciation 6% Net Interest 5% Non Corporate & other GOS
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Investment 17% Gross Operating Surplus—(Capital Income) 36%
Government and Net Exports
13%
16% Taxes on Pdn
7%
50% 40% 30% 20%
Compensation 57%
Personal Consumption 70%
10% 0% Gross Domestic Income (GDI) www.bea.gov
Gross Domestic Product (GDP) 3
GDP share—profits vs wages
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Findings US and global profits at or near 30 year historic peaks in share Profits leveraged and volatile Analyze Industry Trends Foreign share rising Lead Indicator? Use (real) profits/unit real GVA (BEA table 1.15)
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Profits more cyclically sensitive U.S. Economic Accounts 1400
1200
1000
800
600
400
200
0 1970-I
1975-I
1980-I
1985-I
1990-I
1995-I
2000-I
2005-I
BEA profits
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Leverage makes profits cyclical
Financial leverage (Interest)
16 14 12 10 % of GDP
Operating leverage (Depreciation —rises in recession)
8 6 4 2 0 1950
1955
1960
1965
1970
1975 Depreciation
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1980
1985
1990
1995
2000
2005
Depreciation +Net Interest
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Differences with Wall St BEA Coverage
All US operations incl. private, and foreign owned. Operating earnings only. GAAP includes nonoperating items like financing, capital gains/losses Baddebt writeoffs and pension adjustments.
BEA Sources
Tax based reporting, supplemented last two years with Census and industry data
BEA Methods
Current cost “real world” depreciation rates Measurement consistent over time and across sectors Inventory at current cost
www.bea.gov
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Data sources used to estimate profits FinancialAccounting Data Census Bureau Quarterly Financial Reports (QFR) • Available quarterly, within several months of end of quarter • Cover manufacturing, mining, & trade—roughly 1/3 of profits
Data from regulatory agencies & other sources used to supplement QFR data
TaxAccounting Data IRS Statistics of Income (SOI) Data • Corporate incometax return (annual) data • Available with a lag of 2 years www.bea.gov
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BEA and Wall St profits NIPA and S&P Profits Trends
450 400 350
1Q 1990=100
300 250 200 150 100 50 0 1990
1995 S&P Operating EPS
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2000 S&P Reported EPS
2005
BEA Profits from Current Production
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Why did Wall St drop even more? Big trouble in the “nonoperating” side. And some major revisions. Writedowns (goodwill impairment) Pension adjustments Capital gains/ losses
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Industry analysis BEA covers US operations only Tax based Profits Before Tax with IVA is the preferred measure • Available quarterly (in final GDP release/3 mos. after quarter) • Over 20 industry groups
Industry metrics include Profits Dividends Depreciation/Leverage
Can be forecast based on a Macro/Industry view
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Financial SurgingNonfinancial Slowing 60 50 40
% YoY Growth
30 20 10 0 2002
2003
2004
2005
2006
-10 -20 Total Domestic
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Financial
Nonfinancial
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The virtues of seasonal adjustment Wall St reports vs year ago The BEA reports seasonally adjusted Quarters. (sequential) Seasonally adjusted sequential reporting will lead the yrago comparison
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Globalization: Rising foreign share of earnings 30.0
% of National Profits
25.0 20.0 15.0 10.0 5.0
20 05
20 00
19 95
19 90
19 85
19 80
19 75
19 70
19 65
19 60
19 55
19 50
0.0
Foreign Earnings share
p
Gross Foreign as % of National Profits
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Global Profits volatile: setting records 15
% of GDP
14 13 12 11 10 9 8 1980
1985
1990
1995
2000
2005
G-7 Profits % of GDP
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Contact Information
Andrew Hodge Head of Profits Research, BEA andrew.hodge@bea.gov 2026069761
www.bea.gov
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