Who’s bringing home the dough?
…Corporations. Since earnings season is now well underway, I decided to look at the breakdown of aggregate domestic income (gross domestic income). Corporate profits are up 44.7% since the outset of the US recovery, while wages and salary accruals are up just 0.9%.
The chart above illustrates the peak-trough losses (total loss), trough-Q2 2010 gains (total gain), and peak-Q2 (relative to peak) deviations of nominal gross domestic income, disaggregated by income type.
First up, wages and salaries (employer contributions for employee pension and insurance funds and of employer contributions for government social insurance) and private enterprises net of corporate profit incomes grew in sum spanning the recession (private enterprises net of corporate profits includes proprietor’s income, which did fall). Furthermore, the drop in wage and salary accruals, -3.6%, was small compared to the drop in corporate profits, -18.1%.
Second, the corporate profit gains during the recovery massively outweigh the wage and salary gains over the same period, 44.7% versus 0.9%. Corporate profits are now 18.5% above the peak in 2007 IV, while wages and salaries hover 2.8% below.
The problem here is, that the deleveraging cycle is heavily weighted on the household sector (the workers at the corporations) – if corporate profit gains do not translate into hiring and wage gains, or even to further capital spending, economic growth will suffer going forward.
Better put, at the very minimum, the recent surge in corporate profits is not sustainable if firms do not distribute the gains to the real economy. Also, meager wage gains does make healthy deleveraging difficult for household sector. Therefore, the recent surge in gross domestic income (hence, it’s spending counterpart, GDP) is not sustainable if corporate profits are not recycled.
Rebecca Wilder
The story is the right one, but the math needs to be adjusted. Labor compensation is a gross figure. Profits are a net figure. Profits typically swing much more than labor compensation over the course of a cycle, as your own graph shows, though a 44% rise may be kinda toppish.
I understand that compensation is what labor takes home and profit is what capital takes home, so we want to compare them somehow, but raw comparison of % change since the beginning of the recover is open to reasonable objection, and so to distraction from your main point. Perhaps a better comparison would be the size of compensation gain in this recover against the typical size of compensation gain at this point in recovery over the past 5 (or 9 or 12) recoveries, contrasted to a similar comparison of profit gains in this recovery vs the average over the same period.
kharris,
“Perhaps a better comparison would be the size of compensation gain in this recover against the typical size of compensation gain at this point in recovery over the past 5 (or 9 or 12) recoveries”
I agree – and I was thinking this same point as I wrote the post. No time now – perhaps later.
Two points on that, though: (1) this corporate profit recovery is stronger than the comparable “average” deep recession (i.e., ’75 or ’81). This is based on a talk given by Neal Soss, chief economist at Credit Suisse, where he plotted out every economic statistic during the recession/recovery in a historical context. Profits stood out as the sole shining start. So yes, corporate profit growth is big compared to previous recoveries.
(2) I have nothing to say about the comparable recovery in wages (perhaps I will in a future post); but what we do know is that household leverage is “toppish” now compared to every post Great Depression recession. Therefore, the fact that wages are growing at snail-spped compared to profits is not the troubling point, per se, more that wage growth is not sufficient enough to move on a healthy deleveraging path (i.e., non-default).
Overall, the profit-wage differential just reiterates how firms have generated profits: through cost cutting mechanisms. This is not healthy for the economy as a whole and expected income growth.
Rebecca
Yes – and the “Labor compensation is a gross figure. Profits are a net figure” deserves major emphasis. Profits are what is retained after all the bills are paid. Slaries and wages are what you get to work with before you’ve paid for anything. Hence the deleveraging cycle.
Stark, stark difference. So that -3.6% to -18.1% comparison has absolutely no validity.
“if corporate profit gains do not translate into hiring and wage gains, or even to further capital spending, economic growth will suffer going forward.”
Henry Ford, who was a money-grubbing proto-Nazi way ahead of his time knew this 100 years ago. Modern business – not so much. After all the jobs are shipped to Mumbai, who’s gong to buy that new Mustang?
JzB
Profits are up 44%, but that is off a rather big drop in earnings. I will use S&P earnings as an example: In 2006 S&P earnings were 87.72, and in 2009 bottomed at 59.65 for a 32% drop. a 40% increase does a nice job of barely returning us to 2006. Aren’t employemnet and wages a lagging item anyways? A good part of the profit recovery is probably laregely from the banks, which at any moment might give it right back.
Employment and wages do lag, but they are behind schedule in this expansion and for the most part never got on schedule during the prior expansion. Relative to the rest of the post-Gilded-Age, post-Great-Depression era, labor has run behnd for a couple of decades, while corporate income has run ahead.
Gross versus net. To my knowledge, there is no revenue income with which to compare gross versus gross at the aggregated level. If I am wrong, please point me in the direction of that data.
But the numbers are certainly economically comparable.
The 44% gain, i.e., revenues net of non-tax costs and adjusted for inventory and capital consumption, is now mostly retained income – that’s it. Undistributed profits are up 47% over the quarter (not annualized). And wages post just a 0.9% gain? Net dividends are down over 8% over the same period, no transfer to stockholders there either.
Rebecca
That seems to me to be a function of why corporate earnings dropped in the first place – more write-offs of bad assets versus selling less product. There has been less stuff sold, mostly is the real estate, construction and related industries, but that will not easily come back as people are at maximum debt. This recovery will not be a typical one.
Forgot to hedge a if and when we truly recover.
for those of you who want a bit more info on corporate earnings (although a different measure, the total net income of the S&P 500 firms) you might be interested in this.
http://www.zacks.com/commentary/15938/So+Far%2C+So+Good
Most of the growth has come from a huge expansion in net margins as earnings growth has greatly exceeded top line growth.
It would be interesting to see what labor compensation would be if we backed out bank bonuses. Maybe banks did give it back already.
But maybe bonuses aren’t in the number. Since I don’t know how this data gets concocted off the top of my head, I’m subject to errors about these things.
That’s the way it worked last recession, 2001 or thereabouts. I remember looking at the S&P spreadsheet tabulation of earnings back then and “one time” write offs spiked thru the roof.
My feeling is that CEOs throw all in the skeletons in the closet away whenever we have a recession. But this time we had a broad shutdown of orders for inventory, hence the long inventory rebuild that many have noticed as part of the recovery. Last recession it was a phenom confined mostly to tech, i.e. when John Chambers described Cisco as a high speed train hitting a wall.
Rebecca –
Didn’t mean to be disrespectful. I know you’re just dealing with the data that’s there.
No, I don’t have any other data to recommend.
I just want to be cautious about gross and net.
Cheers!
JzB
Hi Rebecca:
Doing more with less Labor and not passing the resulting productivity gains to Labor perhaps? Its going to Capital
Great stuff (I think), but could you give us a graph that’s big enough to read? I’d definitely link to it if you did.
Thanks,
Steve
Rebecca Wilder – “Corporate profits are up 44.7% since the outset of the US recovery, while wages and salary accruals are up just 0.9%.”
Rebecca Wilder – “Furthermore, the drop in wage and salary accruals, -3.6%, was small compared to the drop in corporate profits, -18.1%.”
Rebecca Wilder – “Second, the corporate profit gains during the recovery massively outweigh the wage and salary gains over the same period, 44.7% versus 0.9%. Corporate profits are now 18.5% above the peak in 2007 IV, while wages and salaries hover 2.8% below.”
I agree with these statements. One issue, though, is that corporate pre-tax profits did not peak in 2007 IV at $1,031.6 billion, except during the officially defined period for the recession. Quarterly corporate pre-tax profits peaked in 2006 III at $1.404.1 billion, 26.5% higher than 2007 IV.
For better clarity, let’s review the calendar year second quarter comparison and put the corporate pre-tax profit picture in perspective.
Corporate pre-tax profits (CPTP) for 2010 II were $1,222.7 billion as compared to 2005 II, $1,195.7 billion; 2006 II, $1,342.4 billion; 2007 II, $1,252.8 billion; 2008 II, $916.8 billion; and 2009 II, $844.8 billion.
Corporate pre-tax profits for 2010 II were 2.25% above the 2005 II level; 9% below the 2006 II level; 0.97% below the 2007 II level; 33.3% above the 2008 II level; and 44.7% above the 2009 II level.
Corporate pre-tax profits for 2010 II have recovered very close to the 2007 II level but certainly not the peak of 2006 III, running some 12.9% below that level. We’ll have to see what 2010 III brings to the table in order to make a seasonally adjusted quarterly comparison.
kharris – Thursday, 2:12:22 PM – “Employment and wages do lag, but they are behind schedule in this expansion and for the most part never got on schedule during the prior expansion. Relative to the rest of the post-Gilded-Age, post-Great-Depression era, labor has run behnd for a couple of decades, while corporate income has run ahead.”
Corporate pre-tax profits declined after 1997 III ($802.5 billion) and didn’t reach that quarterly level again until 2003 III ($829.6 billion) representing below peak performance for 24 quarters; 6 years. Quarterly corporate pre-tax profits declined to $621.6 billion in 2000 IV, recovered slightly for two quarters and ran down to $575.5 billion in 2001 IV prior to achieving a sustained recovery until the end of 2006 III, $1404.1 billion. Thereafter, corporate pre-tax profits declined to $636.4 billion in 2008 IV and recovered to $1222.7 billion in 2010 II. Corporate pre-tax profits have been below the peak for 15 quarters. Corporate pre-tax profits for 2010 II are 12.9% below the 2006 III peak.
During the same period, wage and salary accruals increased from $3901.1 billion in 1997 III to $5156.7 billion in 2003 III, an increase of 32.18%. Concurrently, supplements to wages and salaries increased from $794.8 billion to $1241.0 billion, an increase of 56.14%.
Wage and salary accruals (WSA) peaked at $6592.9 billion in 2008 I. WSA for 2010 II were $6,339.4 billion, 3.8% below the 2008 I peak. During the same period, supplements to wages and salaries increased from $1486.2 billion to $1577.8 billion, an increase of 6.16%. Wage and salary accruals have been below the 2008 I peak for 9 quarters.
corp profits must be placed into relation with total capital, which includes wages and fictitious capital — rate of profit more determinant than total mass.
NIPA profit data is at the least questionable, partic within context of globa credit bubble.
does neoclassical macro even have a developed rate of profit theory or does it continue to rely upon a highly questionable micro.