"In this piece, I’m going to derive and
explain the Kalecki-Levy Corporate Profit equation, and then demonstrate its
truth empirically using data collected by the BEA. I’m then going to present tables that show
the values of the components of the equation, as a percentage of GNP, from
1929-2012 annually, and from 1951 to 2013 quarterly, with recessionary periods
shaded in. I’m going to conclude with a brief comment on mean reversion."
"The ratio of Corporate Profit to GNP is currently near a record
high, well above highs seen in prior cycles. Considered in itself, this
condition is negative for equities: it makes corporate profit growth more
difficult going forward. However, it would be a mistake to assume that
the ratio has to revert to the average of a prior era. It doesn’t,
and neither does any other part of the equation.
As a percentage of GNP, corporate profit has remained elevated relative
to historical averages for a full 10 years. It was given an excellent
chance to mean-revert in the Great Recession–but it didn’t. It fell
slightly, and then immediately bounced back–barely breaking below prior highs."
