Corporate profits

Labor productivity, household incomes and corporate profits: and who is the winner?

By Doug Short

Yesterday the Bureau of Labor Statistics released preliminary data for the first quarter Productivity and costs. We learned that the main measure, labor productivity of the non-farm business sector, declined at an annual rate of 1.9% during the first quarter of 2015. Let’s take a look at the full data series of the BLS for this index, which dates from 1947.

As the chart above illustrates, the compound annual rate of change is quite volatile, hence the inclusion of a 10-year moving average.

We get a more useful view of the long-term trend by simply looking at the labor productivity index itself, which is currently chained so that the year 2009 = 100.

Now let’s overlay real median household incomes, for which we have annual data from the Census Bureau from 1967 to 2013.

Growth in labor productivity has clearly not translated into higher incomes for median (i.e. middle class) households. Note that household income data ends in 2013. The Census Bureau will release 2014 data in mid-September. This relatively flat blue line, showing a cumulative growth of 19.2% since 1967, is actually 8.7% from its peak, which occurred in 1999 as the market entered the final phase of the tech bubble. .

So who really benefited from the upward trend in labor productivity? Let’s look at an overlay of the labor productivity index and a log-scale chart of corporate earnings. On the recommendation of my friend Bob Bronson of Bronson Capital Markets Research, we use the series CPATAX in the FRED reference system, which makes it possible to follow the profits of companies after tax with adjustment of the value of stocks (IVA) and adjustment of capital consumption (CCAdj).

Now let’s look at a superposition of the three.

Labor productivity growth has been a boon to corporate profits, but not to household incomes.

So much for the theory of trickle-down economics.