PROFITS,CAPITAL SPENDING & PRICE CONTROLS

Within the Leading Index report there are series on the concurrent and lagging index. One component within these releases is a monthly estimate of unit labor cost in manufacturing. It is not the most reliable economic indicator and is subject to major revisions, but right now it is sending some very interesting information.

It implies that first quarter productivity growth is strong in manufacturing at least, which supports the various estimates that first quarter real GDP growth will be positive.

Moreover, the spread between manufacturing unit labor cost and the PPI is a major driving force explaining nonfinancial corporations profits growth. This data strongly suggest nonfinancial corporate profits are rebounding strongly in early 2008 and that in turn implies that the chances that the US is now in a recession are very low.

Of course a big share of this spread is due to higher oil and food prices that negatively impact consumer spending and create a different set of pressures implying weak or recessionary growth.

In addition one reason that stronger profits implies a stronger economy is because it means that corporations will spend these profits on new capital additions and this will sustain the economy.
However, a major portion of these profits are going to the energy companies and as this data on Exxon shows the oil companies are not spending their profits on additional drilling and exploration this cycle.

Interestingly in the 1970s oil price surge the oil majors spent every penny they could beg, borrow or steal on new exploration and drilling. So in contrast to what economic theory implies, maybe what we need to do is reimpose price controls on oil to induce the oil companies to spend their profits on drilling rather then higher dividends.