By Christopher Swann in Washington and Francesco Guerrera in,New York Published: June 5 2006 03:00
US companies have increased their share of the economic pie at a faster rate over the past five years than at any time since the second world war.
Recent government figures show that profits from current production as a share of national income have risen from 7 per cent in mid-2001 to 12.2 per cent at the start of this year. This rate of growth is unprecedented since collection of these figures began in 1947.
Profits have climbed by 123 per cent over the same period, soaring from $714.5bn (€552.57bn, £378.89bn) to $1,595.4bn - also the fastest increase since records began. Other official data have shown that profit growth by manufacturing companies, often seen as one of the weakest sectors, has outstripped the rest of the economy. The figures suggest corporate America is enjoying one of its best periods despite more competition from low-cost countries and tougher corporate governance and disclosure rules.
Even during the boom of the late 1990s, companies only managed a 90 per cent increase in profits over a four and a half year period. Annual data on profits go back to 1929; there were faster rates of profit growth in the 1930s, as the US emerged from the great depression. "Companies have had an extraordinary winning streak, that has lasted longer than most expected," said Nigel Gault, director of US economics at Global Insight, an economic consultancy. But he said: "It is unlikely that this is sustainable for much longer."
The figures in the national accounts are the broadest measure of corporate profitability, measuring everything from Microsoft's performance to an accountant working out of his garage. As profits have increased as a share of national income, the return going to workers has been in decline, falling from 58.6 per cent in the middle of 2001 to 56.2 per cent in the first quarter of 2006.
Paul Donovan, a global economist at UBS, believes the negotiating position of US workers may have been weakened by globalisation, giving companies the upper hand. "The US labour market may be tightening, but there is still an ample supply of workers worldwide, and this may be capping what domestic workers can de-mand," he said.
Over the past year, unit labour costs rose just 0.3 per cent - a downward revision from the first estimate. Since labour costs represent about 70 per cent of corporate ex-penses, the slow real growth in compensation, coupled with greater efficiency, has more than offset the impact of rising raw material prices for companies.
David Rosenberg, north American economist at Merrill Lynch, said competitive pressure had forced companies to slash healthcare and pension benefits for workers. "Companies are aggressively shifting the burden of benefits on to the labour force and off their balance sheets," he said.
Fat margins and low compensation growth have been positive signs for the Federal Reserve. The minutes of the Fed's May meeting showed members of the rate-setting open markets committee believe companies may initially choose to absorb any rise in costs by cutting profit margins rather than passing costs on to consumers.
Businesses have also benefited from low borrowing costs. Net interest paid as a per cent of national income has fallen from 5.6 per cent to 4.1 per cent since mid 2001.