Corporate profits

The Great Disconnect: US Corporate Profits Rise Without Job Growth

US companies made profits at an annual rate of $1.659 trillion in the third quarter, a Commerce Department says report released on Tuesday. In non-inflation-adjusted terms, this is the highest figure since the government began tracking more than 60 years ago. Since the end of the credit crisis, many companies have started to increase their profits again, but have not started to create jobs again.

The unemployment rate remained unchanged at 9.6% in October, with 14.8 million unemployed, according to official figures.

American companies cut 8.5 million jobs during the last recession; millions of these workers remain unemployed. However, corporate profits are recovering to pre-crisis levels. Indeed, American companies are able to increase their profits by increasing productivity, increasing exports, reducing costs and, in some cases, increasing prices. Productivity simply means extracting more or the same amount of labor using fewer workers. Globally, American companies are leaders in productivity due to the prevailing corporate culture in the United States and fierce competition in many industries. Therefore, in the current situation, they are making more profits with fewer workers.

This concept was illustrated in a recent Bloomberg article:

Campbell (CPB), the world’s largest soup maker, DuPont Co. (DD), the third-largest chemical maker in the United States, and United Parcel Service Inc. (UPS), the largest delivery company worldwide, are asking workers to help save cash by working smarter with existing technology. A potential cost: Efficiency gains reduce the chances of recession-hit jobs coming back.

“When productivity growth comes, then watch out because that’s when companies start not needing as much labor anymore,” said Edmund Phelps, an economist at the Columbia University and Nobel laureate, in an interview.

Some 142 non-financial companies in the S&P 500 reported improvements in operating margins of three percentage points or more from the last three months of 2007, when the previous expansion had peaked, compared to the most recent quarter, according to data compiled by Bloomberg yesterday.

The chart below shows annualized corporate profits, before and after taxes, since 1947:

The following graph shows the growth of corporate profits in terms of GDP:


(Charts source: Bureau of Economic Analysis, via Haver Analytics, as published by The New York Times.)

It represented 11.2% of GDP in the last quarter, a figure that has been growing for seven consecutive quarters. As a result, over the past seven quarters, companies have been making higher profits with little to hire workers, as unemployment remains stubbornly high at around 10%.

The Economist wrote about this dichotomy in the US economy in August in a article titled “Profits, but no jobs”:

Americans loved to hear stories of business success. One of the many quirks of the current dismal economic recovery is that this traditional enthusiasm is sorely lacking. American businesses have rebounded impressively. The quarterly earnings season, which is now almost over, revealed that profits are back to within a hair’s breadth of the all-time highs reached before the slowdown of late 2008. By some calculations, the rate of recovery of profits from their lows is the highest since the end of the Great Depression.

Yet no one seems satisfied. Not investors, who have failed to lift stock prices the way this kind of earnings growth would have led them to at this point in previous economic cycles. Certainly not the politicians, who complain that corporations “hoard” money and create hardly any new jobs. As Robert Reich, an economist at Berkeley and former Secretary of Labor under Bill Clinton, puts it:Conclusion: higher corporate profits no longer lead to increased employment. There is a big decoupling between corporate profits and jobs.” [Emphasis mine.]

American companies are reaping the rewards of the difficult measures taken after the collapse of financial markets in September 2008.

Yes indeed. There is a huge lag between rising corporate profits and job growth. This recovery is not only a “jobless recovery”, but also a “joyless recovery”. According to S&P, non-financial companies in the S&P 500 held more than $1 trillion in cash at the end of the first quarter. Much of this cash is neither being paid out in higher dividends to investors nor being spent on capital investments.

It remains to be seen how long this phenomenon of rising corporate profits without increasing the number of jobs can continue.

Disclosure: No position