The business tax cuts that went into effect in January had a significant effect on corporate profits in the first quarter of 2018, according to new data released by the Bureau of Economic Analysis Wednesday.
The after-tax profit rate for corporations was 12.6 percent in the first quarter, according to an analysis by Evercore ISI’s Ernie Tedeschi, who said that this level of profitability “is historically very high for the US but not the highest it's been in the recovery.”
Tedeschi added that the after-tax profit rate rose by 0.74 percentage points from the last quarter of 2017 to the first quarter of 2018, an increase in the top 10 percent of such changes since 1947. The rise in profitability was entirely attributable to the corporate tax cuts, Tedeschi said.
The tax cuts would have raised profits even more if not for increasing costs, including wages and taxes on production and imports (see the chart below). The Wall Street Journal’s Ben Leubsdorf said that the despite the stellar profit numbers for the quarter, the data showed signs of strain as corporations confront higher costs for labor, materials and transportation late in the cycle of the economic recovery that began in 2009. It will take several more quarters of data to determine whether the growth in profits marks a new period of investment and expansion or merely a temporary jump in a cooling economy.