You are hereMcClatchy: Strong corporate profits amid weak economy - What's up with that?

McClatchy: Strong corporate profits amid weak economy - What's up with that?


March 27, 2011- U.S. corporations continue to post strong profits quarter after quarter, even as the unemployment rate remains high and the U.S. economic recovery plods along in fits and starts. What gives?

Corporate profits grew 36.8 percent in 2010, the biggest gain since 1950, according to Friday's latest report from the Bureau of Economic Analysis. No sign could be more clear that U.S. companies see the so-called Great Recession in the rearview mirror.

The strong profits, however, mask the continued difficult terrain for businesses. Yes, profits are high, but that doesn't mean business is strong.

"It's not that they're fake, it's that they're generated through a bunch of economic anomalies that are not the normal course or normal factors that generate profits," said Martin Regalia, chief economist for the U.S. Chamber of Commerce, America's premier business lobby.


Regalia and other analysts think several factors are behind the strong profits, which seem to contradict other indicators of an underperforming economy, especially the 8.9 percent unemployment rate. These factors include record low interest rates since late 2008, muted demand for borrowing by companies and a surge in productivity that has allowed companies to do more with the same number of workers or fewer.

Profits aren't rising solely because companies are making and selling more widgets to keep up with customer demand, which would be the case in a healthy, booming economy. Instead, they're more profitable because it now costs less to make the same widget, often because there are far fewer workers needed to make it.

"We've been able to generate record profits on very, very low volume and very weak economic growth," Regalia said.

That's not to say things aren't improving. Over the past six months, the economy has gathered steam, and demand is picking up — from factory orders for parts needed in assembly, to a rebound in automotive manufacturing, to consumer purchases rising.

That's a healthy growth trend, but the bigger part of the story remains workforce reductions, technological advances, low lending costs and minimal borrowing. All have combined to give companies unusual control over their balance sheets, and thus their profits.

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