Weird Recovery, Part 2: Where Are The Profits?
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We’ve seen that the recent recession and current recovery are different from anything we’ve seen in most of our lifetimes, and we’ve seen that the nature of this recession and recovery cycle has been that business did not slow down as much as would be expected given the normal pattern. (Read This Data Shows How Weird This Recession Was.)
Business didn’t cut back its production as much as consumers cut back their consumption. Business was left with a lot of goods in the pipeline of inventory, waiting for customers. This means that the strong GDP bounce back we see at the far right in this chart…
…has not been matched by the relatively-meager increase in profits seen in the far right of this chart:
Why? Because although goods and services must be produced before they are consumed, the profit does not occur until they are sold. Production is a necessary precondition of profit, but not a sufficient condition on its own. Business must both build and sell things to be profitable. And until the legal (and emotional) suppression of demand goes away, from both mandatory lockdowns and extra caution by spenders, business will not be able to fully realize the profit which is current locked down in inventory or unused capacity.
But if this analysis is right, most of this amounts to deferral, not a destruction of profit. That probably is not the case in all businesses. We’re not all going to get twice as many haircuts after the vaccine as we used to get. The lost haircuts of last year are lost forever. Ditto for mani-pedis and probably a lot of restaurant visits. Business can count on two date nights per week instead of one. But for the big parts of the economy like building, durable goods, houses, and cars it is likely that the demand will be made up and the profit will bounce back. Typically profit leads recoveries, but this time around, it looks like the recovery might be leading the profit.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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