Earnings’ impact on economy

U.S. workers and consumers seem to be doing pretty well at the moment. Businesses, not so much.

We’ve been hearing a lot over the past decade-plus, though, about the diverging fortunes of U.S.-based corporations and U.S.-based people. The corporations have for the most part been thriving in an age of globalization. The people, not so much. Corporate profits in the U.S. have almost tripled since 2000, adjusted for inflation; real median household income is down 7 percent since then.

Could it be, then, that the fortunes of corporations and average Americans have become so disconnected that things could now go in the other direction, with corporations struggling in the face of a global slump and consumers laughing all the way to the store for years to come?

Short answer: I don’t think so, at least not for that long.

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One major reason why corporations have thrived while people haven’t is that big corporations in particular were able to take advantage of growth overseas even as the U.S. economy stagnated. Estimates of the share of revenue that the companies in the Standard & Poor’s 500 Index get from abroad range from 33-48 percent. The Bureau of Economic Analysis’ much broader measure of foreign earnings, meanwhile, shows a huge rise since the middle of the 20th century.

Some of the biggest names in U.S. business are particularly dependent on overseas markets. Apple, for example, got 59.8 percent of its revenue and 62.8 percent of its operating income from outside the Americas in its 2015 fiscal year. Exxon Mobil got 67.3 percent of revenue from outside the U.S.

Overall, corporate earnings have become less dependent on the health of the U.S. economy. The big question is whether this also means that the U.S. economy has become less dependent on them.

In the past, a decline in corporate profits has usually been bad news for the U.S. economy.

What usually happens is that, with profits under pressure, corporations start slashing jobs and cutting investment. Consumers eventually respond by cutting spending, and the economy falls into recession. Since 2011, corporate profits’ share of national income has been declining. But with so much of that profit now coming from outside the U.S., it’s at least possible that corporations will slash jobs and cut back on investment somewhere else.

The U.S. oil and gas industry is already slashing jobs and cutting back investment in the face of an oil-price collapse. But so far, most of the rest of corporate America hasn’t. •

Justin Fox is a Bloomberg View columnist.

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