- The Washington Times - Friday, April 1, 2005

In addition to confirming that the U.S. economy continued to surge ahead during the fourth quarter at a nearly 4 percent annual rate, a Commerce Department report revealed Wednesday that the current business cycle’s blistering growth of corporate profits continued during the fourth quarter and throughout 2004.

After soaring by 14 percent in 2002 and 16.8 percent in 2003, pre-tax profits jumped another 15.7 percent last year. As a result, over the past two years alone, taxes on corporate profits increased by nearly 50 percent, rising from $184 billion in 2002 to $269 billion last year. Meanwhile, net dividends increased by more than 12 percent in 2004. And retained earnings, which measure the amount of savings in the business sector, climbed 20 percent last year after soaring 30 percent in 2003.

Not surprisingly, businesses have been drawing upon their robust cash flows to finance a rapid rise in capital spending. Enabling the economy to take off, business investment during the past seven quarters has been growing at a markedly faster pace than consumer spending. Thus, while consumption of goods and services has been rising at a nearly 4 percent annual rate since the beginning of spring in 2003, business investment has been growing at a nearly 12 percent annual rate over the same period. The investment subgroup of equipment and software spending, which is particularly instrumental in generating productivity gains, has been expanding at an annual rate of nearly 15 percent since March 2003.

Domestic industries alone generated nearly $1 trillion in profits last year. Manufacturing profits exceeded $105 billion in 2004, reflecting a gain of 57 percent over 2003. Illustrating what it rightly describes as “the virtuous circle between profits and capital investment,” Business Week recently reported that “the cutting-edge parts of the economy, like telecommunications, are snapping out of the coma they fell into when the tech bubble burst in 2000-2001.” Verizon, for example, more than doubled its profits last year to $7.3 billion; that enabled the nation’s largest telecommunications company to easily finance a 12 percent increase in “its already-hefty capital-spending budget,” which exceeded $13 billion in 2004.

Over the past three years, the U.S. economy’s profit machine has demonstrated its persistence by overcoming some huge obstacles. First and foremost were the consequences of the stock-market collapse that began in 2000, which preceded the 2001 recession, which was further complicated by the September 11 terrorist attacks. Just as the economy was crawling along in late 2001, the corporate-finance scandal erupted with the bankruptcies of Enron and WorldCom. Following shortly was an extended period of uncertainty in the run-up to the war in Iraq. More recently, rising oil prices and interest rates have challenged corporations. Through it all, however, profits managed first to recover and then to soar, underwriting the recent surge in business investment.

With polls showing the public reflecting increasingly negative views about the economy, there has been a conspicuous shortage of Bush administration officials publicly touting the positive aspects of an economy generating unprecedented profits and a surge in investment spending. The profits news is simply too good to be ignored.

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