How the Fed Stopped the “Corporate Profit Recession” (and the Media Fell for it)

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This about sums up the US economy in more than one way.

The end of the corporate “profit recession” has been declared last week. It was based on data by the Bureau of Economic Analysis, released on May 27. Corporate profits, after declining with some zigs and zags since their peak in the third quarter 2014, suddenly ticked up in the first quarter 2016. And everyone was ecstatic.

Corporate profits are in the eye of the beholder. For example, “adjusted earnings” – the ex-bad items earnings proffered by companies and analysts – of the S&P 500 companies have dropped four quarters in a row, since their peak in Q2 2015, on a year-over-year basis.

But by BEA’s estimates, one of the broadest measures out there, corporate profits peaked in Q3 2014. The BEA tracks “profits from current production” based on all US corporate entities. It makes a number of adjustments, including the Inventory Valuation Adjustment and the Capital Consumption Adjustment. It thus produces a seasonally adjusted annual rate for each quarter that then can be compared to prior quarters. This annualized rate shows what profits would be like at this rate for the entire year.

By this measure, corporate profits peaked at $1.643 trillion annualized rate in Q3 2014. By Q4 2015, profits had plunged 16% to $1.380 trillion. That’s the “corporate profit recession.” But then there was a tiny uptick of $8.1 billion in Q1 this year, which has been heralded as the long-awaited end of the profit recession.

Note the circled uptick in profits that was used by the media to proclaim the end of the profit recession, and how the overall profit picture since Q1 2012 smacks of stagnation, or worse:


But there’s a detail – a huge detail – that the media conveniently forgot to point out: whose profits are included in “corporate profits.” The BEA tells us (emphasis added):

These organizations consist of all entities required to file federal corporate tax returns, including mutual financial institutions and cooperatives subject to federal income tax; nonprofit organizations that primarily serve business; Federal Reserve banks; and federally sponsored credit agencies.

Ah yes, the Federal Reserve Banks (FRB), which include the 12 regional Federal Reserve Banks, such as the New York Fed. They’re private banks, owned by the largest financial institutions in their respective districts. And as private banks, their consolidated profits are added to US financial sector profits, and thus overall corporate profits, along with those from Goldman Sachs, JP Morgan, and your local bank down the street.

It works like this: the Fed creates money out of thin air, buys securities with that money, adds the interest payments from those securities to “Net Income,” then pays most of it back to the Treasury, whose interest payments became part of this income in the first place. If this seems a bit absurd and circular, so be it. We’re interested in another absurdity here.

For the first quarter, the Federal Reserve Banks reported a consolidated profit that had jumped 11% from a year earlier to a record $24.9 billion!

And this magic profit was added to the BEA’s measure of “corporate profits.” Total corporate profits ticked up $8.1 billion in the first quarter, including the Fed’s magic $24.9 billion. And without the Fed’s magic profits?

Stéfane Marion, Chief Economist & Strategist at Economics and Strategy, National Bank of Canada, annualized the Fed’s profits to make them comparable to the BEA’s annualized corporate profits. Annualized, the Fed’s profit “surged $16.5 billion in Q1 – to a record $117.9 billion,” he wrote in a note. The magic profits of QE:


So somewhat embarrassingly for the gurus of the end of the corporate profit recession: “Were it not for this increase, overall profits in the US would have actually been down for a third consecutive quarter.”

In fact, on an annualized basis, the Fed’s magic profits accounted for 27.2% of US financial sector profits and for 5.3% of total US corporate profits (blue line in the chart below), “the highest level in a generation.”

As shown, there have been times when that proportion was greater, but never outside recessions and never when short-term rates were not rising significantly (historically, the Fed’s balance sheet was skewed towards T-bills, unlike now):


“Bottom-line,” wrote Marion: “An improvement in corporate profits that is driven by the central bank is not a sign of a healthy economy.”

And that about sums up our economy in more than one way.

Now even the SEC woke up to the game of “adjusted earnings” that companies and analysts play to hide some ugly realities. But what will the media do? Read… OK I Get it, Corporate Earnings Are a Fairy Tale and Reality is Crummy, But Do They Have to Push it This Far?

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  29 comments for “How the Fed Stopped the “Corporate Profit Recession” (and the Media Fell for it)

  1. interesting
    June 1, 2016 at 1:51 am

    well i for one can confirm a profit peak as of Q3-2014 and it’s been all down hill since then. So the recession that really started in 1997 continues on.

  2. Agnes
    June 1, 2016 at 1:52 am

    Just because the Fed has not made ***profits*** on T-bills doesn’t mean there are not a boatload of them on their balance sheet. And I note that the entire profit reporting graph is divided by 3month T-bills(unless the graph is mislabeled)(that is what ‘versus’ means).

    But great clarification work Wolf.

    One of the reasons I am for a commodity-backed currency (and I really don’t care if it is salt and cattle or seashells)is that it helps us poor tempted consumers to be more prudent about our choices. It will be interesting to see if consumers can withstand the urge to buy(that is what a lack of profits means)long enough to to find True North in a fiat system. No one ever has before.

    • June 1, 2016 at 7:25 am

      The portion of corporate profits produced by T-bills (short-term paper) is now so minuscule because their yield is near zero. I think they’re included in this chart to show that in the past, the Fed’s profit rose when it raised short-term interest rates, and the income from T-bills soared, even as corporate profits fell during the subsequent recession. This time around, it’s the longer maturities (that still have a visible yield) that are producing the gains.

      Also remember, during “Operation Twist,” the Fed turned to longer maturities to bring down long-term interest rates. That’s where a big part of its income comes from now.

  3. night-train
    June 1, 2016 at 2:08 am

    I liked the comment about absurdity, although I am not sure the word still has currency in this circus. So, how is what the BEA does different from watering down the Scotch?

    • Robert
      June 1, 2016 at 11:30 am

      Yes, as in going from 86 to 80 proof. You can’t even drown your sorrows.

  4. d
    June 1, 2016 at 3:13 am

    Wolf very nasty cure in the lows in chart 1.

    Chart 3 also has it but the top of the arch shows as a peak as the chart is more aggressive and compressed laterally.

    Those curves are not good omen’s.

  5. Thomas Malthus
    June 1, 2016 at 3:22 am

    You know we are more screwed than a burned out, retired porn start when the men behind the curtain have to resort to something so desperate as this.


    Another great article btw — nowhere to be found in the MSM

  6. hoop
    June 1, 2016 at 6:31 am


    So the fed sucked 117.9 billion income (should have gone to the public, think pension funds) out of the market and gave it to the treasury. It looks to me the Fed is following a kind of austerity policy. The money is directed from private hands to public hands. As a consequence less/no new investments are made to support the future economy. Funny to hear Greenspan talk yday saying the productivity is decreasing and as a consequence all hell will break loose.

    • c smith
      June 1, 2016 at 8:43 am

      “The money is directed from private hands to public hands.”

      Yes. ZIRP reduces real private investment to nothing, as there is no return to be earned. Meanwhile, the Fed buys public debt with newly created cash, funding public “spending”, which has no return parameters and no “required” ROI. Ovet time our economy gets weaker and weaker. Classic case of bad money (govt fiat) driving out good (private investment).

  7. NotSoSure
    June 1, 2016 at 7:27 am

    Ah, but where you can have profit, you can also have losses. When the market forces interest rate up in the future regardless of what the Fed declares, wouldn’t the losses have to show up?

  8. wholy1
    June 1, 2016 at 8:02 am

    LBO M&A asset stripping, “Fraud Preserve” secret “special facility windows”, off-shore PPPT ops, HFT’s, Fed/Fraud-funded share buy-backs.
    “GreenspIn”, the financial “disaster master” Fed/Fraud swindler has admitted as much “ITself”! “Corp profits” = continued Fed/Fraud Preserve largese! Oooops! Censored again!

  9. ke
    June 1, 2016 at 8:58 am

    When we focus on a perceived enemy, we become the enemy, a digital world. The corporation simply replaces superficial human physical traits with superficial political ideology/mythology/branding.

    • ke
      June 1, 2016 at 9:12 am

      This is an investment website, I presume, and the best investments over time are those that return artificial demographic variability symptoms to the future curve. The 1% not making decisions based on oil and crony green energy are going to deliver the next sustained demographic surge.

  10. robt
    June 1, 2016 at 9:05 am

    Has the Fed marked-to-market yet all the goods it bought from the banks in the last 7 years or so?

  11. Petunia
    June 1, 2016 at 9:37 am

    Don’t blame the media. We should all know by now they have no idea how financial markets work, even those that cover the financial world. When they do know, they are not allowed to tell us the ugly truth. BTW, has anybody seen Tom Friedman lately? Maybe he fell off the planet.

    • Markar
      June 1, 2016 at 10:31 am

      He could very well have fallen off the planet. After all, he did write “The World Is Flat”

    • polecat
      June 1, 2016 at 11:37 am

      He’s in a small, sealed room somewhere, hands in the ‘prayer position’, eyes shut, reciting his lines ……. for the next shill interview……

      • polecat
        June 1, 2016 at 11:39 am

        Oh……and he’s still wearing guru black !

  12. Coaster Noster
    June 1, 2016 at 12:15 pm

    Board Game Economy: this is not “Capitalism” or “Free Enterprise”, and don’t kid yourself into thinking that our laws and taxes and terms of ownership are remotely close to “free enterprise”. This is a “rules-based” economy, and neither promotes “socialism” or “communism” or “private enterprise”. The world economy is simply a “Board Game” based on rules, a set of rules that is not a conspiracy, but an implicit collusion by the .01 of One Percent of the wealth, to preserve and further what they own.
    The rest of “play”, because there is no choice in the matter. You could choose an environment with less landing squares on the board, say in Zimbabwe or Abu Dhabi, or the PRC, but it is still a colluded economy, worldwide.

    • Thomas Malthus
      June 1, 2016 at 9:22 pm

      Capitalism only works when you have an abundant source of cheap to extract oil (and other resources)

      When you run out of that the prohibitive costs of oil extraction destroy all economic systems including capitalism

      At the end of the day the foundation of the any economy is the resource base…. and the master resource is oil.

      According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.

      For most of the last century, cheap oil powered global economic growth. But in the last decade, the price of oil production has quadrupled, and that shift will permanently shackle the growth potential of the world’s economies.

      There is no way to fix this problem. We are in the dying days of civilization.

      • night-train
        June 2, 2016 at 2:28 am

        TM: We have other sources to power the world. The biggest impediment to developing these resources is political will and those benefitting from the current resource trying to block change at every turn. We should pursue infrastructure improvement, including a smart grid, and put the money into realizing the potential of other energy sources. This would put oil in its proper place as a feedstock for petrochemicals.

        • Thomas Malthus
          June 2, 2016 at 5:11 pm

          Actually – we don’t.

          Replacement of oil by alternative sources

          While oil has many other important uses (lubrication, plastics, roadways, roofing) this section considers only its use as an energy source.

          The CMO is a powerful means of understanding the difficulty of replacing oil energy by other sources.

          SRI International chemist Ripudaman Malhotra, working with Crane and colleague Ed Kinderman, used it to describe the looming energy crisis in sobering terms.[13] Malhotra illustrates the problem of producing one CMO energy that we currently derive from oil each year from five different alternative sources. Installing capacity to produce 1 CMO per year requires long and significant development.

          Allowing fifty years to develop the requisite capacity, 1 CMO of energy per year could be produced by any one of these developments:

          4 Three Gorges Dams,[14] developed each year for 50 years, or
          52 nuclear power plants,[15] developed each year for 50 years, or
          104 coal-fired power plants,[16] developed each year for 50 years, or
          32,850 wind turbines,[17][18] developed each year for 50 years, or
          91,250,000 rooftop solar photovoltaic panels[19] developed each year for 50 years

          A partial list of products made from Petroleum (144 of 6000 items)

          One 42-gallon barrel of oil creates 19.4 gallons of gasoline. The rest (over half) is used to make things like:

          Renewable energy ‘simply won’t work’: Top Google engineers

          Two highly qualified Google engineers who have spent years studying and trying to improve renewable energy technology have stated quite bluntly that whatever the future holds, it is not a renewables-powered civilisation: such a thing is impossible.

          Both men are Stanford PhDs, Ross Koningstein having trained in aerospace engineering and David Fork in applied physics. These aren’t guys who fiddle about with websites or data analytics or “technology” of that sort: they are real engineers who understand difficult maths and physics, and top-bracket even among that distinguished company.

          Even if one were to electrify all of transport, industry, heating and so on, so much renewable generation and balancing/storage equipment would be needed to power it that astronomical new requirements for steel, concrete, copper, glass, carbon fibre, neodymium, shipping and haulage etc etc would appear.

          All these things are made using mammoth amounts of energy: far from achieving massive energy savings, which most plans for a renewables future rely on implicitly, we would wind up needing far more energy, which would mean even more vast renewables farms – and even more materials and energy to make and maintain them and so on.

          The scale of the building would be like nothing ever attempted by the human race.

          In reality, well before any such stage was reached, energy would become horrifyingly expensive – which means that everything would become horrifyingly expensive (even the present well-under-one-per-cent renewables level in the UK has pushed up utility bills very considerably).

        • Genevieve Hawkins
          June 4, 2016 at 12:58 am

          I’ve lived off grid in Thailand before I think you’re both right. On the one hand, nothing beats oil for power: this is not as simple as attaching a few solar cells to your roof and keeping your dishwasher, microwave, xbox, washer and dryer, refrigerator, hot water heater and tv humming along all at the same time like nothing ever changed. But we’re already at ridiculous levels of energy wastefulness in the US. So a model that just plugs in ever rising energy consumption and tries to stack up oil versus renewables will come up with a doom and gloom scenario. And both sides seem to ignore the return on energy invested, i.e. the total amount of effort required to get how many units of energy. My guess is that the long term solution to this will come from all three sides: a reduction in personal energy consumption, combined with a realistic reflection of true energy costs, which will hopefully lead to a decentralized system where most households have a semi self sustaining means of energy production, like some solar panels on their roof, based on what is the best locally available return of energy. And there might be more handwashing of dishes and clothes. There’s nothing wrong with this model other than the fact that our economic models are based on ever rising levels of growth into infinity….

      • Agnes
        June 3, 2016 at 12:49 am

        Thomas Malthus I agree that our current Extreme-Skimming form of Capitalism is unsustainable. Some of the cream must be kept to nourish young thought–and who can tell what youngster will have the great Edison-like flourish of ideas?

        Schools as factory fodder producers are dangerous.

        As I have mentioned before I hold with Fekete’s six-sided form of capitalism, which is not inherently incompatible with more expensive energy. But I totally agree that cheap energy helps. And I suspect coal infrastructure will make a swift return when people are cold.

        Thanks for the links.

  13. Arbuthnot
    June 1, 2016 at 2:09 pm

    On a related subject, I think it may be interesting to see the effect of slumping consumer sentiment, if it continues, on new car sales as details for the 2Q start to trickle out.. That’s one recent bump up for the economy that seems to be fading a bit. And what about auto paper delinquencies? …. and softening used car prices?

    I still chuckle over a story that appeared roughly a year ago about a Bubba somewhere in Dixie driving off a lot in a new $40,000 pickup truck after talking the dealer into taking his shotgun as a temporary downpayment……

    The warning signs are everywhere and one has to wonder if Janet is beginning to realize that she better raise interest rates pronto or she may not be able to raise them at all……..

    • night-train
      June 2, 2016 at 2:37 am

      Perhaps I should explain Dixie to you. Hunting season was over. Bubba didn’t need that shotgun, but he did need that $40,000 pick-um-up truck to pull his $40,000 bass boat. They look real good next to his doublewide. Besides, who ever heard of a home in the south with just one shotgun anyway? And I’m not just whistlin’ Dixie here………..down in Dixie!

  14. June 1, 2016 at 3:19 pm

    This type of manipulation is common in many organizations, and is commonly known as “pencil whipping.” This applies from everything from worker productivity to, as noted, “earnings.”

  15. Agnes
    June 2, 2016 at 12:54 am

    A whole nuther article would cover Failure to Deliver of treasuries:

    And as I found mentioned in that same old(31 Aug 15) article, Repo that had no collateral attached,,,

    But what jumped out at me was that the ftd spikes happened when funds were needed for shorting silver (and gold).

  16. June 12, 2016 at 9:00 pm

    The CURMUDGEON will be publishing an article on this topic based on Wolf’s excellent article. My colleague Victor Sperandeo & I have each talked to the BEA and have done additional investigative research that pinpoints the so called justification for including Fed bank profits in US corporate profits. The article will be published at under CURRENT LINKS OF INTEREST

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