Corporate Profits and Relationship to Investment

Reported earnings in the second half of the 1990s showed a dramatic improvement in profitability, which was interpreted as the reversal of the long-term decline in US profitability. However, National Income Accounts did not confirm this argument at that time, which financial markets ignored entirely. The ‘governance crisis’ that ensued confirmed that creative accounting was mainly responsible for that interpretation. Consequently, the question of whether the US economy is still characterised by long term declining profitability is pertinent. A further question is whether this decline might reverse itself with the current recovery. The alternative interpretation would be that any improvement might be temporary in view of the US long-term trend of shifting production overseas. We address these issues in this chapter.