These days everyone (myself included) has been talking about what happened to American business during the Great Recession and the tepid recovery that has followed. But what did the performance of American business look like in the years before the Great Recession? Were profits growing or shrinking? And what was the source of that growth or decline in income?
The IRS Statistics of Income provides some interesting data to show what has happened to the profitability of American corporations between 1999 and 2007 (right before the recession hit). Despite including the mild recession of 2001 and the dot com bust, these years were good ones for corporate America. The net income of the average American corporation increased by more than one third (34.1 percent) in real terms, reaching $252,396 (in 1999 dollars).
That sizeable increase begs the question: Why? The data suggest that one reason was by keeping costs in check. The average American corporation’s revenues increased only slightly in real terms between 1999 and 2007, but costs increased even less. As a result, the IRS data show that profit margins improved over the eight year period, with net income as a percentage of revenues at the average firm increasing from 5.7 percent to 7.6 percent between 1999 and 2007.
American companies were also worth significantly more in 2007 than they were in 1999. The net worth of the average American corporation increased 27.2 percent in real terms from 1999 to 2007.
Moreover, the net worth of American businesses increased relative to their sales. The net worth of the average corporation increased from 81 percent of one year’s revenues to 100 percent of one year revenues.
Of course, profitability and net worth didn’t increase in every industry. For example, the net income at the average utility shrank from $5,539,064 in 1999 to $4,573,696 in 2007 when measured in real terms.
The table below shows the net income per firm in 1999 dollars in both 1999 and 2007, as well as the percentage change between the two years for the 18 major sectors of the economy. Some of the numbers are a bit surprising, such as those for the average construction businesses, which made 1.7 percent less in real terms in 2007 than it did in 1999, despite the housing boom.
Click to see larger version of above chart
In addition, the negative news about U.S. manufacturing not withstanding, net income at the average manufacturing business increased by nearly two-thirds in real terms between 1999 and 2007.
In short, in many industries, American corporations increased their net income substantially between 1999 and 2007, in part because they got better at holding costs in check. Maybe that pattern holds clues for how American business will behave during the current economic recovery. Rather than expanding hiring and building new operations, the average corporation may try to rebuild its profits by minimizing costs.
That’s how any business will survive in these times – by cutting costs wherever they can.
Hopefully this period will help American corporations be lean enough to succeed in the increasingly competitive global economy. Thanks for the analysis.
No wonder the bubble burst, just look at the real estate percentage.
Dear Professor Shane: You penned a great article
As an experienced purchaser and cost analyst, I agree with the notion that cutting cost is good for the bottom line and $1 saved purchasing dollar is more worth than a sales $1.
As for a discussion about the recession, I recommend you to read Brett Owens’s guest post, “Comparing the Current Recession/Depression with the Great Depression via Benjamin Roth’s Diary.”