It's hard out there for a CEO. There's a Democrat in the White House, and Washington is being ruled by a coalition of socialists and anticapitalist thugs. There's uncertainty about taxes and policy. Business leaders are constantly being vilified for taking home huge paychecks without providing meaningful returns to shareholders, or creating jobs, or boosting wages. The newly passed financial-reform bill requires CEOs of public companies to measure and report the ratio of their pay to that of their workers. Blackstone Group CEO Stephen Schwarzman is complaining that the Obama administration is like Hitler invading Poland.
With government and the media making life so difficult for CEOs, it must be nearly impossible to turn a profit. Right? Um, not really.
The headline number from the quarterly GDP report released by the Commerce Department last Friday was the sorry 1.6 percent growth rate of the economy in the second quarter. But the release also provided detailed data on corporate profits. And while the GDP number was disappointing, the latter was impressive. Corporate profits, which stood at $1.5 trillion in 2007, fell sharply to $1.26 trillion and essentially stagnated in 2009. But since the Obama presidency started, the trajectory in quarterly profits has reversed. Quarterly profits (reported at an annualized rate) rose from $1.18 trillion in the second quarter of 2009 to $1.42 trillion in the fourth quarter of 2009 to $1.64 trillion in the second quarter of 2010. In the second quarter of 2010, corporate profits were up 39.2 percent from the year-before quarter.
Corporate profits aren't just rising in absolute terms, they're rising in relative terms. Corporate profits as a percentage of GDP are back up to nearly record highs. Check out this assemblage of quarterly GDP data for the last several years. If you divide line 17 (corporate profits with inventory and capital-consumption adjustments) into line 1 (overall GDP), you can calculate corporate profits as a percentage of GDP—i.e., the chunk of the economy that corporations are keeping as profits. If companies and business were under assault, you might expect that this proportion would be falling. But as the chart here shows, that's not what is happening.
After hitting a low point in the fourth quarter of 2008, the measure has risen in every quarter and checked in at 11.25 percent in the second quarter of 2010—the highest level since the last quarter of 2006. In other words, the chunk of the economic pie being reserved for business owners and bosses has been growing sharply in the past couple of years, despite slow growth, and is generally back at the levels it was during the business-friendly Bush administration.
Why is corporate America doing well when so many powerful forces seem to be arrayed against it? Some sectors are benefiting from government policy. Banks are profiting from low interest rates and the ongoing federal subsidies and guarantees. Even as the industry squawks loudly about demonization and tough regulation, banks just reported their best quarter results in three years, according to the FDIC.
But CEOs deserve most of the credit for this turnaround. When the economy slowed dramatically in late 2008 and early 2009, they prepared for Armageddon: they slashed costs, restructured, made cold and swift decisions, and relentlessly pursued productivity and efficiency. The result: America's CEOs collectively reengineered their businesses so they could produce profits with a lower volume of business. They've also continued—and intensified—their longstanding practice of beating the living daylights out of America's labor force. Despite Democratic control of Washington, labor has never been weaker. Organized labor continues its long decline. Union membership fell again in 2009 as a percentage of the workforce, to 12.3 percent, down from 13.4 percent in 2000. And in an age of excess capacity and high unemployment, disorganized labor isn't doing so hot either. In the past year, employee compensation as a percentage of GDP has fallen a bit.
To review: Corporate profits have largely recovered to pre-crisis levels. A disproportionate share of economic growth is finding its way into the coffers of corporate America. CEOs are in an extremely strong negotiating position vis-à-vis their employees. And yet America's bosses think they are members of an oppressed minority.