On Friday the federal government released the latest chapter of a year-old economic mystery: If you're a corporation, the economy is great. If you're a worker, the economy is still pretty horrible. According to the Bureau of Economic Analysis, real corporate profits neared an all-time high in the last three months of 2010, with companies raking in an annualized $1.68 trillion in pre-tax operating profits. (After tax, that comes to $1.25 trillion, about equal to the GDP of India.) The Federal Reserve estimates that companies are sitting on about $1.9 trillion. At the same time, unemployment remains at 8.9 percent, and job growth is still anemic.
How can the corporate economy be so profitable while the jobs economy remains so weak? Part of the answer lies in improved productivity. When the recession hit, businesses fired millions of workers then asked the rest to make up the difference—and, in many cases, they did. Productivity increased 3.9 percent in 2010, while labor costs fell. To simplify: Businesses paid fewer workers to do more. In addition, big corporations found customers overseas. Americans might not be ready to spend just yet, but consumers in Asia and elsewhere are—exports climbed 21 percent to $1.28 trillion in 2010.
It also helps to look at which companies are really raking it in. For most of 2009 and 2010, a range of U.S. corporations saw post-recession rebounds in profits. The manufacturing sector, for instance, made about $140 billion in annualized profits in the second quarter of 2009, a recession-era low. Last quarter, it made about $241 billion. Similarly, auto manufacturers lost about $50 billion in the last quarter of 2008. Today, the sector is breaking even.
But in the last quarter of 2010, the story was all about Wall Street. Profits actually decreased a bit at nonfinancial firms. But companies like investment banks and insurers saw profits climb to an annualized $426.5 billion. The financial sector now accounts for about 30 percent of the economy's overall operating profits.
What makes America's financial firms so profitable, so soon after the housing collapse and financial crisis? At the heart of the matter is a decrease in competition: The recession knocked out Bear Stearns, Lehman Bros., scores of banks, and dozens of other companies, leaving the survivors bigger fish in a less-crowded stream. Additionally, financial firms have enjoyed ample support from Uncle Sam. Since the recession hit, the availability of cheap cash from the Federal Reserve has helped increase banks' margins, and thus their profits.
Still, record-high profits do not necessarily translate into improvements in the economy—as the country's 14 million jobless workers would be (not so) happy to tell you. For the past year, companies have hesitated to spend all of that cash, worried about a lack of good investment opportunities and fearful about demand. The upside is that it seems they are beginning to spend down their $1.9 trillion pile. The downside is that it does not seem that it will be to the immediate benefit of American workers.
There are a few ways big businesses are starting to tap their cash reserves. For one, a number of companies have increased buy-backs of their own shares. Bloomberg reports that companies listed in the Standard & Poor's 500 have approved $149.8 billion in buy-backs in the past three months—about 50 percent more than they did in the first three months of 2010. Second, the big corporate piles of cash have set off a flurry of mergers and acquisitions. A survey by Thomson Reuters and Freeman Consulting predicted a 36 percent rise in mergers in 2011, with North America cited as a particularly attractive region. Already, 2011 has seen signs of increased activity. For instance, this month, AT&T announced its plan to purchase the U.S. arm of T-Mobile for about $39 billion, much of it in cash. Finally, a number of companies have used or are planning on using their excess cash to bump up their dividend payments, giving investors a portion of the profits.
Buy-backs and dividend payments might make investors wealthier, and that has a positive impact on the economy. But it does not translate into jobs, at least not quickly. Plus, mergers often bring layoffs. In other words, corporate America isn't using its historic hoard of cash in ways that will immediately benefit working America—meaning the long slog is not looking like it will get any shorter.