The Corporations Are Alright
The country is experiencing two quite different paths since it plunged into a recession in the spring of 2020. Many families struggle with widespread and increasing job losses, long-term unemployment, more debt, hunger, poverty and the threat of evictions among a surging pandemic. In contrast, corporations and by extension stockowners are doing very well after recovering very quickly from the initial market crash.
Corporations saw a massive jump in profits from July to September 2020. In inflation-adjusted terms, before-tax profits for non-financial corporations amounted to an annualized $1.5 trillion in the third quarter of 2020. This was an increase of 58.4% over the low profits in the second quarter of 2020. It was also the largest amount of real profits since the end of 2014. For corporations, the recession was effectively over by the summer of 2020.
The profit rate – the ratio of before tax profits to total corporate assets – also shot up. It stood at a relatively high 3.2% in the third quarter of 2020, up from a low of 2.0% in the second quarter of 2020 and well above the 2.9% during the fourth quarter of 2019, before the recession hit. In the end, the ratio of profits to assets from July to September 2020 was the highest since the third quarter of 2017. The recent increase in the profit rate is especially remarkable since the value of corporate assets also grew during the entire time. Profits just grew much faster than what nonfinancial corporations were worth.
The picture for after-tax profits looks even better for corporations. The total amount of after-tax profits was the highest on record going back to 1952. The share of profits used to pay taxes was a measly 14.1% in the third quarter of 2020. This was the lowest rate on record, dating back to 1952.
Low corporate taxes are a key economic policy legacy of the Trump era. The share of corporate taxes out of profits had already dropped sharply after passage of the Trump tax cuts in 2017. They amounted to a low 18.0% of profits from October to December 2017, when the Tax Cut and Jobs Act was passed. They then immediately fell to 15.2% in the first quarter of 2018 and never exceeded 18% of profits again since then. Over the last few quarters, it hovered around 17% before dropping to its new record low of 14.1%. Interestingly, corporate tax payments actually increased from the second to the third quarter of 2020, but not as fast as profits overall.
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Profits soared especially in sectors that gained a lot of attention in the pandemic. Total before-tax profits rose by 70.0% from the second to the third quarter for corporations in nonfinancial industries. This group of industries, where profits rose particularly quick, also includes professional, scientific and technical services. These industries include, among others, research and development in biotechnology, advertising as well as computer systems design. All of these industries saw their business in much greater demand during the pandemic. There are clear winners from the shift in demand during these unusual times. These industries also comprise a wide variety of sectors that were hard hit by the pandemic, including educational services; health care and social assistance; arts, entertainment, and recreation; accommodation and food services. Many larger corporations in these sectors were able to buy up smaller, failing firms, boosting their own gains. The recession likely spurred a greater concentration in corporate power and profitability.
Corporations hoarded much of the profits. Corporate liquid assets reached new record highs in the third quarter of 2020. Nonfinancial corporations sat on $6.2 trillion in cash by the end of September, up from $5.1 trillion at the end of 2019. This extra trillion is not money that went into the economy to hire more people or start new investments for a post-pandemic economy. Corporate coffers swelled, while many families struggled to pay their bills.
Corporations hoarded cash for different reasons. For one, they may have expected another economic slowdown later in the year. They may have also taken advantage of the crisis to squeeze out more money for their shareholders, first setting aside money that they can then pay out. The Washington Post in December reported that many of the largest U.S. corporations were profitable but cut staff amid the pandemic, even after earlier vows to not do that. They used some of those high profits to pay out dividends and buy back their own shares. All in all, corporations used 46.7% of their before tax profits for dividend payouts or share repurchases. The bottom line is that corporations and their shareholders are alright.