The strong economic recovery since the pandemic started has been good for almost everyone. Nonfinancial corporations are no exception. They have been raking in high profits and using those mainly to pay dividends to their shareholders and building up their stockpiles of cash. Investments in new buildings, computers, car parks and other equipment are at reasonable levels, but not an exceptional priority for corporations.
The latest Federal Reserve data on the country’s finances show that nonfinancial corporations have been very profitable over the past few years. Their inflation adjusted profits increased by an average annualized rate of 12.1% from December 2019 to December 2023 – from $1.6 trillion to $2.5 trillion (in 2023 dollars). For the business cycle that started with the first quarter of 2020 then, before tax profits averaged 4.0% of all nonfinancial corporations’ assets, the largest ratio since the business cycle that ended in the middle of 1980. After-tax profits averaged 3.4% of total corporate assets. This was the highest average since the business cycle that ended in late 1969. Nonfinancial corporations have not been this profitable in almost half a century.
Almost half of those profits went to paying dividends. Dividend payouts accounted for 48.9% of all before-tax profits of nonfinancial corporations during the current business cycle. This is the largest share of any business cycle since the 1950s. And, dividend payouts amounted to 57.6% of after-tax profits, in line with the previous two business cycles, starting in March 2001. Paying shareholders remains a high priority for nonfinancial corporations.
Nonfinancial corporations have also used their profits to increase their cash stockpiles. Liquid assets amounted to $7.2 trillion in December 2023 up from $6.1 trillion in December 2019 – all measured in December 2023 dollars. This increase in liquid assets was faster than the overall gains in all nonfinancial corporate assets. The share of liquid assets out of total assets increased from 10.8% in December 2019 to 12.1% at the end of 2023. Aside from rewarding shareholders, highly profitable companies prioritize their own cash reserves.
On the other side of the ledger, nonfinancial corporations have not been spending extraordinarily large amounts on capital expenditures. Capital expenditures always exceed profits as companies finance a lot of their investments with debt or new equity issues. But, the ratio of capital expenditures for this business cycle averaged to a historically low 132.8% of after-tax profits – the lowest such ratio on record, dating back to 1952. Capital expenditures from nonfinancial corporations equaled 10.0% of gross domestic product (GDP) in the last quarter of 2023 and 9.9% for the entire business cycle, in line with prior business cycles. This also means that corporations are not leading an investment boom across the economy, even as the country faces massive challenges in the areas of climate change, artificial intelligence and population aging, to name some of the most important ones.
Corporations are highly profitable and using those profits to reward their shareholders, while also increasing their cash holdings. They do not spend above-average amounts on investments, even in the face of looming challenges. Given that the country undoubtedly needs more and faster investments to move towards more renewable energy sources, greater energy efficiency, higher labor productivity and more cybersecurity, the question is how policy can incentivize those investments. Recent legislation such as the Inflation Reduction Act of 2022 provide a wide range of tax incentives and subsidies, particularly to accelerate the transition to a green economy. Those incentives cost money. Congress could consider raising corporate taxes to pay for those. Corporations after all are hoarding a lot of their funds, rather than investing them for a stronger economic future.