America Inc. share of GDP – 12 or 3 pct?

July 17, 2012

Wall Street has been doing pretty well in recent years. Just how well is illustrated by the steady rise in corporate profits as a share of the national economy. Look at the following graphic:

Of it, HSBC writes:

The profits share of GDP in the United States must rank as one of the most chilling charts in finance.

What this means is that around 12 percent of American gross domestic product is going to companies in the form of after-tax profits. A year ago that figure was just over 10 percent and in 2005 it was just 6 percent. In contrast, the share of wages and salaries in the U.S. GDP fell under 50 percent i n 2010 and continues to decline. Comparable figures for the UK or Europe are harder to come by but analysts reckon the profits’ share is within historical ranges.

Yet HSBC does not feel U.S. profit-GDP ratio levels are unsustainable. Analysts there argue that comparing profits to U.S. GDP  alone gives an inaccurate reading because U.S. companies operate all all over the world and increasingly, their profits come from fast-growing emerging markets.  There is truth in that. Just check out Coca-Cola’s results today showing Latin America sales volumes rising 3 times faster  than in the home markets of North America.  HSBC analysts write:

There is a widely held perception that profit levels are unsustainable. The argument goes that the profits share of GDP is high and ultimately it will mean revert. However, the profits share is not high when compared to World GDP, which we argue is the appropriate yardstick.

So compare U.S. profits with world GDP  and the figure suddenly looks quite reasonable — under 3 percent. This points to a radically different picture and profits’ share here is not out of line with the historical range, HSBC adds.

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