As earnings season opens this week, corporate profits are expected to be lower than originally anticipated, according to The Wall Street Journal and other news sources. Today, we look to the Review of Radical Political Economics (RRPE) for related analysis. José A. Tapia Granados of The University of Michigan published “Statistical Evidence of Falling Profits as Cause of Recession: A Short Note” on February 3, 2012 in RRPE. To see other OnlineFirst articles, click here. From the introduction:
Profits—the basic variable in business activity—were one of the major concepts analyzed by the founders of political economy, from William Petty to Adam Smith, David Ricardo, and John Stuart Mill. However, profits are quite rarely mentioned in modern discussions in mainstream economics about macroeconomic issues in general or recessions in particular. Even in the heterodox field of progressive or radical economics the 2007-2009 crisis has been seen as related to a number of factors, but not falling profitability.
Corporate profits in the U.S. economy, however, had a peak in the third quarter of 2006, well before the upsurge of the serious disturbances in financial markets and the severe downturn of the real economy that were baptized as the Great Recession. As in other recent recessions, profits started decreasing several quarters before the downturn began to be noticeable. This note presents statistical evidence on the fall of profits preceding recessions and discusses the economic meaning of that evidence.