Globalization, technological innovation, and supply chain efficiency explain the current resilience of U.S. corporate profits—one of the few drivers of the U.S. economy at the moment.
Globalization, technological innovation, and supply chain efficiency explain the current resilience of U.S. corporate profits—one of the few drivers of the U.S. economy at the moment. The U.S. Department of Commerce recently reported that corporate profits (which includes both domestic and foreign profits) now make up the largest percentage of the country's gross domestic product (GDP) since the 1950s. This ratio currently stands at just under 13 percent of GDP, amounting to a total of US $1.9 trillion (see Figure 1). However, wage and salary disbursements have been slowly trending downward from 47 percent of GDP in 1985 to 44.4 percent in the second quarter of 2011 (see Figure 2). These trends seem to point to increased inequality between workers and managers, driven to some extent by the outsourcing of lower-skilled jobs to Asia.
U.S. domestic corporate profits—defined as American corporations' profits generated from operations in the United States—trended downward from the 1950s through the mid-1980s. But then that trend reversed, with profits experiencing wild swings during recession cycles. In the 1960s, domestic corporate profits were slightly less than 11.0 percent of GDP, falling to 7 percent by 1985.
Article Figures
[Figure 1] Corporate profits as percentage of U.S. GDPEnlarge this image
[Figure 2] Wage and salary disbursements as percentage of U.S. GDPEnlarge this image
Currently, domestic corporate profits stand at 10.1 percent of GDP. Analysts have been amazed at the rate at which domestic corporate profits have been able to spring back following the "Great Recession" (December 2007 to June 2009). Indeed, domestic corporate profits as a percentage of GDP fell to their lowest point in over 60 years during the recession and then rebounded to their pre-recession levels in just over one year. One reason why is that greater supply chain efficiency is allowing domestic companies to maintain lower inventories and avoid overshooting (accumulating inventory) when a slowdown occurs. This helps corporate profits to snap back more quickly. Inventory-tosales ratios adjusted for inflation have been trending down for the retail and wholesale trade over the past 15 years.
The innovation of business-to-business e-commerce has also changed the cost and profit picture for many companies. In 2003, approximately 21 percent of U.S. manufacturing sales and 14.6 percent of wholesale sales were e-commerce-related. By 2008 those percentages had increased to almost 40 percent for manufacturing and 16.3 percent for wholesale trade.
A major game changer in the last couple of decades has been the increasing influence of foreign profits—the profits U.S. corporations earn from overseas receipts. In the mid-1960s, U.S. corporations were making approximately 6.5 percent of their profits from foreign operations, which translated to less than 1 percent of GDP. By the mid-1990s, foreign profits started playing a stronger role in overall corporate profitability. Foreign profits are now slightly less than 4.3 percent of GDP—up more than four-fold from the mid-1980s—and American corporations now make 30 percent of their profits from foreign sources.
Comparative advantage comes into play
One of the central concepts behind the idea of "comparative advantage" advanced by British economist David Ricardo (1772-1823) is that countries specialize in what they do best (that is, most efficiently and cost-effectively), and trade is the central mechanism for exchanging those goods and services. Thus, globalization, trade liberalization, and free trade benefit all nations. Domestic and foreign profits benefit from increased globalization in different ways, and today technological and supply chain innovations are making world trade more profitable in ways David Ricardo could not have imagined.
U.S. and European companies have discovered the advantages of outsourcing low value-added production and service operations to countries with an abundance of productive yet low-wage laborers. Call centers in India and assembly plants in China are just two of many examples. (Approximately 60 percent of Chinese exports, in fact, are sanctioned by U.S. and European corporations.) Outsourcing enables companies to retain the more skilled and higher value-added distribution, design, and technical production processes in their home countries while importing services and goods with lower valued-added components. By doing so, they are optimizing their production cycles and minimizing their costs, thereby improving margins.
As emerging countries continue to develop, demand for high value-added exports from the United States and Europe is growing. Oddly, 30 percent of current U.S. exports are services. This is in addition to domestic corporate profits and makes them more resilient in times of domestic recession. There is considerable anecdotal evidence suggesting that service exports have higher margins than goods and material exports because there are no inventories to worry about and transportation costs (if any) are lower.
Foreign corporate profits have been a blessing for U.S. companies, since the global slowdown in 2008 through 2009 in China, Brazil, and India was relatively mild while U.S. and Western European economies were still dragging. Increasing consumer spending in foreign markets, especially Asia, continue to play a major role in improving U.S. corporate profitability by helping to prop up profits when U.S. domestic consumer spending is anemic.
Protect your profitability
Early in her political career, the British Prime Minister Margaret Thatcher often said that "there is no alternative" to trade liberalization, free trade, and globalization. That appears to be true for U.S. corporations, whose performance is becoming increasingly dependent on overseas operations to bring higher and more stable profits. However, the rising productivity of many Chinese and Indian industries is placing considerable wage and price pressure on U.S. companies' outsourcing operations. Many countries want to move up the value-added chain. In addition, the extensive, very specialized production concentrations that have developed due to some countries' comparative advantage have created considerable supply chain risks from such factors as natural disasters or political instability. Companies might want to think about building a few redundancies in their supply chain networks in order to hedge against events that may be improbable, yet if they happen—and unfortunately they do, as we saw in Japan earlier this year—can make the difference between profit and loss.
Business software vendor Cleo has acquired DataTrans Solutions, a cloud-based procurement automation and EDI solutions provider, saying the move enhances Cleo’s supply chain orchestration with new procurement automation capabilities.
According to Chicago-based Cleo, the acquisition comes as companies increasingly look to digitalize their procurement processes, instead of relying on inefficient and expensive manual approaches.
By buying Texas-based DataTrans, Cleo said it will gain an expanded ability to help businesses streamline procurement, optimize working capital, and strengthen supplier relationships. Specifically, by integrating DTS’s procurement automation capabilities, Cleo will be able to provide businesses with solutions including: a supplier EDI & testing portal; web EDI & PDF digitization; and supplier scorecarding & performance tracking.
“Cleo’s vision is to deliver true supply chain orchestration by bridging the gap between planning and execution,” Cleo President and CEO Mahesh Rajasekharan said in a release. “With DTS’s technology embedded into CIC, we’re empowering procurement teams to reduce costs, improve efficiency, and minimize supply chain risks—all through automation.”
And many of them will have a budget to do it, since 51% of supply chain professionals with existing innovation budgets saw an increase earmarked for 2025, suggesting an even greater emphasis on investing in new technologies to meet rising demand, Kenco said in its “2025 Supply Chain Innovation” survey.
One of the biggest targets for innovation spending will artificial intelligence, as supply chain leaders look to use AI to automate time-consuming tasks. The survey showed that 41% are making AI a key part of their innovation strategy, with a third already leveraging it for data visibility, 29% for quality control, and 26% for labor optimization.
Still, lingering concerns around how to effectively and securely implement AI are leading some companies to sidestep the technology altogether. More than a third – 35% – said they’re largely prevented from using AI because of company policy, leaving an opportunity to streamline operations on the table.
“Avoiding AI entirely is no longer an option. Implementing it strategically can give supply chain-focused companies a serious competitive advantage,” Kristi Montgomery, Vice President, Innovation, Research & Development at Kenco, said in a release. “Now’s the time for organizations to explore and experiment with the tech, especially for automating data-heavy operations such as demand planning, shipping, and receiving to optimize your operations and unlock true efficiency.”
Among the survey’s other top findings:
there was essentially three-way tie for which physical automation tools professionals are looking to adopt in the coming year: robotics (43%), sensors and automatic identification (40%), and 3D printing (40%).
professionals tend to select a proven developer for providing supply chain innovation, but many also pick start-ups. Forty-five percent said they work with a mix of new and established developers, compared to 39% who work with established technologies only.
there’s room to grow in partnering with 3PLs for innovation: only 13% said their 3PL identified a need for innovation, and just 8% partnered with a 3PL to bring a technology to life.
Even as a last-minute deal today appeared to delay the tariff on Mexico, that deal is set to last only one month, and tariffs on the other two countries are still set to go into effect at midnight tonight.
Once new U.S. tariffs go into effect, those other countries are widely expected to respond with retaliatory tariffs of their own on U.S. exports, that would reduce demand for U.S. and manufacturing goods. In the context of that unpredictable business landscape, many U.S. business groups have been pressuring the White House to pull back from the new policy.
Here is a sampling of the reaction to the tariff plan by the U.S. business community:
American Association of Port Authorities (AAPA)
“Tariffs are taxes,” AAPA President and CEO Cary Davis said in a release. “Though the port industry supports President Trump’s efforts to combat the flow of illicit drugs, tariffs will slow down our supply chains, tax American businesses, and increase costs for hard-working citizens. Instead, we call on the Administration and Congress to thoughtfully pursue alternatives to achieving these policy goals and exempt items critical to national security from tariffs, including port equipment.”
Retail Industry Leaders Association (RILA)
“We understand the president is working toward an agreement. The leaders of all four nations should come together and work to reach a deal before Feb. 4 because enacting broad-based tariffs will be disruptive to the U.S. economy,” Michael Hanson, RILA’s Senior Executive Vice President of Public Affairs, said in a release. “The American people are counting on President Trump to grow the U.S. economy and lower inflation, and broad-based tariffs will put that at risk.”
National Association of Manufacturers (NAM)
“Manufacturers understand the need to deal with any sort of crisis that involves illicit drugs crossing our border, and we hope the three countries can come together quickly to confront this challenge,” NAM President and CEO Jay Timmons said in a release. “However, with essential tax reforms left on the cutting room floor by the last Congress and the Biden administration, manufacturers are already facing mounting cost pressures. A 25% tariff on Canada and Mexico threatens to upend the very supply chains that have made U.S. manufacturing more competitive globally. The ripple effects will be severe, particularly for small and medium-sized manufacturers that lack the flexibility and capital to rapidly find alternative suppliers or absorb skyrocketing energy costs. These businesses—employing millions of American workers—will face significant disruptions. Ultimately, manufacturers will bear the brunt of these tariffs, undermining our ability to sell our products at a competitive price and putting American jobs at risk.”
American Apparel & Footwear Association (AAFA)
“Widespread tariff actions on Mexico, Canada, and China announced this evening will inject massive costs into our inflation-weary economy while exposing us to a damaging tit-for-tat tariff war that will harm key export markets that U.S. farmers and manufacturers need,” Steve Lamar, AAFA’s president and CEO, said in a release. “We should be forging deeper collaboration with our free trade agreement partners, not taking actions that call into question the very foundation of that partnership."
Healthcare Distribution Alliance (HDA)
“We are concerned that placing tariffs on generic drug products produced outside the U.S. will put additional pressure on an industry that is already experiencing financial distress. Distributors and generic manufacturers and cannot absorb the rising costs of broad tariffs. It is worth noting that distributors operate on low profit margins — 0.3 percent. As a result, the U.S. will likely see new and worsened shortages of important medications and the costs will be passed down to payers and patients, including those in the Medicare and Medicaid programs,” the group said in a statement.
National Retail Federation (NRF)
“We support the Trump administration’s goal of strengthening trade relationships and creating fair and favorable terms for America,” NRF Executive Vice President of Government Relations David French said in a release. “But imposing steep tariffs on three of our closest trading partners is a serious step. We strongly encourage all parties to continue negotiating to find solutions that will strengthen trade relationships and avoid shifting the costs of shared policy failures onto the backs of American families, workers and small businesses.”
In a statement, DCA airport officials said they would open the facility again today for flights after planes were grounded for more than 12 hours. “Reagan National airport will resume flight operations at 11:00am. All airport roads and terminals are open. Some flights have been delayed or cancelled, so passengers are encouraged to check with their airline for specific flight information,” the facility said in a social media post.
An investigation into the cause of the crash is now underway, being led by the National Transportation Safety Board (NTSB) and assisted by the Federal Aviation Administration (FAA). Neither agency had released additional information yet today.
First responders say nearly 70 people may have died in the crash, including all 60 passengers and four crew on the American Airlines flight and three soldiers in the military helicopter after both aircraft appeared to explode upon impact and fall into the Potomac River.
Editor's note:This article was revised on February 3.
GE Vernova today said it plans to invest nearly $600 million in its U.S. factories and facilities over the next two years to support its energy businesses, which make equipment for generating electricity through gas power, grid, nuclear, and onshore wind.
The company was created just nine months ago as a spin-off from its parent corporation, General Electric, with a mission to meet surging global electricity demands. That move created a company with some 18,000 workers across 50 states in the U.S., with 18 U.S. manufacturing facilities and its global headquarters located in Massachusetts. GE Vernova’s technology helps produce approximately 25% of the world’s energy and is currently deployed in more than 140 countries.
The new investments – expected to create approximately 1,500 new U.S. jobs – will help drive U.S. energy affordability, national security, and competitiveness, and enable the American manufacturing footprint needed to support expanding global exports, the company said. They follow more than $167 million in funding in 2024 across a range of GE Vernova sites, helping create more than 1,120 jobs. And following a forecast that worldwide energy needs are on pace to double, GE Vernova is also planning a $9 billion cumulative global capex and R&D investment plan through 2028.
The new investments include:
almost $300 million in support of its Gas Power business and build-out of capacity to make heavy duty gas turbines, for facilities in Greenville, SC, Schenectady, NY, Parsippany, NJ, and Bangor, ME.
nearly $20 million to expand capacity at its Grid Solutions facilities in Charleroi, PA, which manufactures switchgear, and Clearwater, FL, which produces capacitors and instrument transformers.
more than $50 million to enhance safety, quality and productivity at its Wilmington, NC-based GE Hitachi nuclear business and to launch its next generation nuclear fuel design.
nearly $100 million in its manufacturing facilities at U.S. onshore wind factories in Pensacola, FL, Schenectady, NY and Grand Forks, ND, and its remanufacturing facilities in Amarillo, TX.
more than $10 million in its Pittsburgh, PA facility to expand capabilities across its Electrification segment, adding U.S. manufacturing capacity to support the U.S. grid, and demand for solar and energy storage
almost $100 million for its energy innovation research hub, the Advanced Research Center in Niskayuna, NY, to strengthen the center’s electrification and carbon efforts, enable continued recruitment of top-tier talent, and push forward innovative technologies, including $15 million for Generative Artificial Intelligence (AI) work.
“These investments represent our serious commitment and responsibility as the leading energy manufacturer in the United States to help meet America’s and the world’s accelerating energy demand,” Scott Strazik, CEO of GE Vernova, said in a release. “These strategic investments and the jobs they create aim to both help our customers meet the doubling of demand and accelerate American innovation and technology development to boost the country’s energy security and global competitiveness.”