Brad DeLong's Semi-Daily Journal (2004)

Certainly not unexpected -- a huge chunk of corporate profits are coming from productivity gains, as well as reduced hiring.

The added bonus is with less hiring, job hopping is lessened.

All that puts downward pressure on wages.

Life is good if you are an executive of a multinational corporation. You can sell out the local population and economy just so long as your company is making a profit from somewhere on the planet. Americans are heavily armed, however, so the prevailing greed in the executive suite may be short sighted if they think they can hide behind the rent-a-cop at the little guard shack for their gated communities when the shit hits the fan.

Corporate tax collections are way down also, both as a result of tax code changes and tax avoidance schemes. I wonder how much that contributes to the apparent profits of corporations. Brad posted a chart several weeks ago that made it look like the tax reductions contributed almost all of the profits increase.

I have seen a statistic various places that over 60% of corporations in 2000 paid no income tax at all.

Price is right about the broader trend here, but by starting his comparison in the first quarter of 2001, he skews the data quite sharply. In 2001, corporate profits as a percentage of GDP (as measured by the NIPA) were lower than they had been at any time in the postwar period. Earnings for S&P 500 companies in that quarter were 40% lower than they'd been a year before. So comparisons to previous business cycles have to be tempered by the recognition that corporate profits never fell as far in previous recessions as they did in 2001. As corporate profits' share of GDP returned to normal, the growth rate was therefore bound to be unusually high. Even now, as a percentage of GDP, corporate profits are just about where they were in the mid-1990s, which was right around the time the economy started to boom. We need considerably more evidence (or at least some evidence) before accepting Price's implicit assumption that the current level of corporate profitability is a bad thing for the economy.

Another thought. given the continuation of this trend, the global imbalance of export driven economies exporting to the American consumer (along with the U.S. trade deficit) would eventually be challenged by a new phase: a decrease in consumer spending. At some point consumers will not be able to take on more debt, and may not be able to keep spending given these income decreases. Where does global growth come from then?

Increasing corporate profitability from wage declines will run into the decreasing consumer spending from the same wage declines. Projecting from trends of declining private income and increasing consumer debt, it seems to me an estimate could be made as to when that would happen. Any ideas?

I'm not an economist, but...

It's pretty clear to me that the problem with the economy isn't any lack of wealth, but that the wealth we have is concentrated in the wrong place, i.e., perpetuating a capital glut that caused the crash that set off the recession in the first place, then feeding a deflationary output gap while undermining both employment and overall compensation for those who are working.

The private sector won't address this because it has no incentive to as long as labor markets are weak and the sustainability of consumer spending is in doubt. Government should've stepped in to correct the imbalance between capital accumulation and wages, but it appears that the Bush administration prefers to spends trillions we don't have to make the imbalance even worse.

OK, I'll shut up now.

How much of the earnings increase is attributable to currency conversion, the carry trade, and other FRB/GSE "promotions"?

Not exactly labor intensive activities, wot?

"At some point consumers will not be able to take on more debt, and may not be able to keep spending given these income decreases. Where does global growth come from then?"

Mmmm. A dollar depreciation vis-a-vis the RNB might come handy here. We want these Chinese workers to buy more American stuff... (And then Japan would perhaps contemplate letting the yen depreciate too.) But that would require that the Bush Administration start to act in a fiscally responsible way, because otherwise watch those interest rates. Let's keep that idea in the box until November. ;-)

"perpetuating a capital glut that caused the crash that set off the recession in the first place, then feeding a deflationary output gap while undermining both employment and overall compensation for those who are working."

If prices have been stable or slightly declining (although not lately), then it seems to me that real wages must, at least, have had a hard time coming down, which may (or not) help explain lack of hiring (up until lately), especially in the face of soft demand. Then again, demand not only depends on those of us who earn wages but also on those who don't earn wages anymore because they have joined the rank of the unemployed or of discouraged workers.

In any case, I think the near ponzi game consisting in figuring out how much debt the American consumer is ready to take on / capable of servicing without cutting back on consumption is nearing its due end. In another world with a different political setup and different economic policies, it may have been viable for a longer while but that's not the world we live in, I am afraid.

Thanks Steve for giving us the broader perspective ( 2001 being a poor year as a basis for comparison), but I think Camille has it right: the "shift" in the distribution of income is so lopsided that one has to wonder how the consumer is going to make the purchases that yield these princely profits. Without that robust shopper, the American consumer, where are we?
Since it looks unlikely at this time that refinancing will provide much support here ( recent significant declines in refi as a share of total mortgaging), M2 may be worth watching again. The tax rebates will help but the gas prices don't. (China's voracious appetite for steel and oil don't either).

Funny, one of the contemporary explanations for the market tanking in 1929 was that profits weren't spread far enough.

The growth hasn't been real, it's just been liquidity extraction.

We may be looking at a double-dip recession here. The money supply year over year, only grew about 4.5%. With inflation at 5%, that means that the economy shrank 0.5%. For the previous year over year, it was 6.5% to put it in perspective. So money supply growth has shrunk even compared to last year. The Economist and Nathan Newman do a pretty good job taking apart the highly faked GDP numbers. Jobs are growing, but they always lag anyway, so they'll peak and then as the economy slides you'll see them dip too. You can check the refs at an article on my site.

In other words however, we are in a liquidity extraction phase. The words used by one person of my acquiantence is "sucker's rally". With interest rates expected to rise latter in the year, I don't think the economy is really robust enough to hold together. Money supply is pretty much supporting that view right now.

Is this saying what I think it says - while corporate profits have been soaring, the only thing keeping total labor compensation from actually *declining* has been some combination of public-sector (i.e. government) salaries continuing to increase, and health care benefits getting more expensive?

Just in case the trickle-down theory needed one last nail in its coffin, boy howdy, this is it.

Class war? *What* class war?

Despite the fact that the last two recessions have been mild recessions the swing in profits --EPS-- has been much bigger than normal.

After tax profits peaked in 1997 and only regained that level in 2001. After tax profits
as a share of nominal GDP is now at 6.4% vs.
a normal cyclical peak of around 7% and low of about 4% to 5%.

Normally profit margins have a massive bounce and the big gain in profits occurs when the early cycle productivity bounce allows unit labor costs to drop below pricing. But in this recovery the point that the big early cycle productivity gains lasted for two years rather than one allowed the big pop in margins to last longer than normal. The best place to see this is to look at the profit per unit of output in the productivity data for nonfinancial corporations.

In earlier cycles S&P EPS surpassed their prior
peak after about two to 2.5 years. In the early 1990 cycle it was 5 years before profits surpassed their prior peak. That was one reason
Wall Street, Greenspan and many others mistook the double digit earnings gains of the 1990s for a secular shift in earnings when it was really
just an extended trought to peak rebound.S&P operating EPS are just now regaining their
prior peak.

While I agree that we have a major problem of income inequality that is risk to the recovery
do not get carried away about the fact that we had two years rather than one year of strong productivity lead margin improvement.

As has been amply demonstrated on Brad's site in economic reports already, the Year 2001 ushered in a pandemic sea-change to America, a permanent class of un- and under-employed's, and with it,
a permanent disconnect between corporate profits and productivity, versus worker real wages.

The stat's and chart methods just haven't caught up with Third Millenium New Math. Until they do, we can't believe ANYTHING we read.

How can a bank lay off 10% of its workforce, and generate 25% profitability increase overnight?

1)Someone is cooking the books;
2)The old formulas are fatally flawed.

Does Wall Street care? Not at all....

The Chicago Trib has a special report today on the Working Poor.
http://www.chicagotribune.com/news/printedition/chi-0404250538apr25,1,3768875.story?coll=chi-printnews-hed [reg req'd]

Mostly anecdotal, but a good reminder that distribution is skewed among wage earners as well as between labor and capital. These folks haven't been liquidating equity through refis. And they've been tapped out their credit cards long ago.

Are the working poor meaningless to the macro picture (other than as demands on state gov't services and health care)? Or is there a tipping point where Walmart's inexorable expansion becomes self-defeating? Since they don't pay their "associates" enough for them to be Walmart customers, is continuous rapid growth a strategic mistake? It would be ironic if in the future we come to need a new class of "enlightened" management or investors a la that famously enlightened tycoon, Henry Ford. Certainly Ford had reasons to look at his relations with his labor force differently than today's managements and investors.

Nadezha, that's a good question. I'd say that the answer is yes, but that we won't get one, partly because investors' collective wisdom has a pervasive effect on modern corporate decisionmaking. Ford was able to write his own ticket wrt labor relations because he enjoyed a self-created near-monopoly on his product. Today, though, if a few companies cut costs through wage restraint and/or layoffs, then investors will demand that everyone does.

Good point, Robin Hood. The last time we had 25% unemployment, a much larger percentage of the population owned their homes outright and had independent access to at least minimal means of subsistence. And a lot fewer people were in debt slavery to credit card companies.

If we ever reach Depression levels of unemployment again, I believe we'll simply see an end to mortgages and landlord property. People will stop making rent and mortgage payments, and maybe even paying property tax. There aren't enough sheriffs' deputies around to collect when that happens.

"Funny, one of the contemporary explanations for the market tanking in 1929 was that profits weren't spread far enough."

Where's your model? Do you have any citations?

Steve Carr wrote, "Price is right about the broader trend here, but by starting his comparison in the first quarter of 2001, he skews the data quite sharply."

But your comment isn't really meaningful either without a broader reference to trends, and whether trends in the 1990s were normal by postwar standards.

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