Inicio > Economía, Economía marxista > “Statistical Evidence of Falling Profits as Cause of Recession”: J. A. Tapia Granados

“Statistical Evidence of Falling Profits as Cause of Recession”: J. A. Tapia Granados

Tapia Granados, José A. “ Statistical Evidence of Falling Profits as Cause of Recession A Short Note”, Review of Radical Political Economics December 2012 vol. 44 no. 4 484-493.

Data on 251 quarters of the U.S. economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn leading to a fall in demand, seems to be a basic mechanism in the causation of recessions.

Abstract

Data on 251 quarters of the U.S. economy show that recessions are preceded by declines in profits. Profits stop growing and start falling four or five quarters before a recession. They strongly recover immediately after the recession. Since investment is to a large extent determined by profitability and investment is a major component of demand, the fall in profits leading to a fall in investment, in turn leading to a fall in demand, seems to be a basic mechanism in the causation of recessions.

JEL codes: E01, E11, E32
Keywords: business cycles, recessions, profits, national accounts

1. Introduction

Profits—the basic variable in business activity—were one of the major concepts analyzed by the founders of political economy, from William Petty to Adam Smith, David Ricardo, and John Stuart Mill. However, profits are quite rarely mentioned in modern discussions in mainstream economics about macroeconomic issues in general or recessions in particular. Even in the heterodox field of progressive or radical economics the 2007-2009 crisis has been seen as related to a number of factors, but not falling profitability.

Corporate profits in the U.S. economy, however, had a peak in the third quarter of 2006, well before the upsurge of the serious disturbances in financial markets and the severe downturn of the real economy that were baptized as the Great Recession. As in other recent recessions, profits started decreasing several quarters before the downturn began to be noticeable. This note presents statistical evidence on the fall of profits preceding recessions and discusses the economic meaning of that evidence.

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