Companies profit while economy plods, pay lags

With unemployment still high, workers have little leverage to demand higher wages
Associated Press
Nov 6, 2013

Look at the U.S. economy and you'll notice an unusual disconnect.

The economy is being slowed by a tight job market, scant pay raises and weak business investment. Yet corporate profits are reaching record highs and fueling record stock prices.

What gives?

How are companies managing to earn so much money in a sluggish economy? And why aren't their profits goosing the economy?

For starters, weak job growth has held down pay. And since the recession struck six years ago, businesses have been relentless in cutting costs. They've also stockpiled cash rather than build new products or lines of business. And they've been earning larger chunks of their profits overseas.

All of which is a recipe for solid profits and tepid economic growth. The economy grew at a meager annual rate of just 1.8 percent in the first half of 2013. The unemployment rate is 7.2 percent, far above the 5 percent to 6 percent considered healthy.

Even so, corporate profits equaled 12.5 percent of the economy in the April-June quarter, just below a 60-year high reached two years ago. Profits of companies in the Standard & Poor's 500 have nearly doubled since June 2009. Earnings appear to have risen again in the July-September quarter.

Big companies like Kellogg, FedEx and Best Buy have been slashing costs in the face of slowing revenue. Their strategy has been working: Despite sluggish revenue, their profits are up.

Burger King's sales dropped last quarter as competition intensified. Yet the company's earnings surged because it cut expenses and enjoyed growth overseas.

"Corporations have more market power than workers have and have kept wage growth to subdued levels," said Dean Maki, an economist at Barclays. "That's left more for corporate profits."

Those solid earnings have helped boost stock prices. So has the Federal Reserve's drive to keep long-term interest rates near record lows: Lower bond yields have led many investors to shift money out of bonds and into stocks, thereby boosting stock prices.

The Dow Jones industrial average has jumped nearly 20 percent this year, closing at 15,639 on Monday, just below its record high.

"If we ended the year at these levels, it would be a phenomenal year," said Bob Doll, chief equity strategist with Nuveen Asset Management.

Here are factors economists cite for the gap between healthy corporate profits and subpar economic growth:

FLAT PAY

Wages and salaries equaled just 42.6 percent of the economy in the April-June quarter, near a record low set in 2011.

More than 8.5 million jobs were lost in the recession and its aftermath, leaving workforces leaner and more productive. Corporate revenue rose as the economy recovered.

But workers haven't benefited much. With unemployment still high, they've had little leverage to demand higher pay. Many have been happy just to have a job.

"We've just had a very lopsided economic recovery," said Ethan Harris, an economist at Bank of America Merrill Lynch.

Smaller paychecks have deprived Americans of money to spend. In the 30 years before the recession, consumer spending grew an average of 3.4 percent a year. Since 2010, just after the recovery began, it's risen just 2.2 percent a year.

"If workers don't have any money, businesses don't have any customers," said Nick Hanauer, an entrepreneur who has written about U.S. economic disparities.

The stock market's gains have boosted total U.S. household wealth. But they haven't enriched most Americans. The wealthiest 10 percent of households own about 80 percent of stocks.

COST CUTTING

This week, Kellogg said it would cut about 7 percent of its workforce — 2,200 jobs — by 2017. The cuts are part of a "global efficiency and effectiveness program," the company said.

Even though Kellogg's sales were flat in the July-September quarter compared with a year earlier, it squeezed out 2.5 percent more net income. A key factor: It cut administrative and borrowing costs. Its shares have risen 15 percent in the past year.

FedEx is cutting jobs, too. And though its quarterly revenue rose just 2 percent, its earnings grew 7 percent. The company has cut maintenance costs by replacing older aircraft with more fuel-efficient planes. The shift helped reduce maintenance costs 11 percent in the June-to-August quarter.

The new planes are merely replacing older aircraft rather than expanding FedEx's fleet. So the economy doesn't stand to benefit as much.

The average sales growth of an S&P 500 company was 2.35 percent in the first six months of 2013, down from 3.76 percent in 2012, according to S&P Capital IQ. The average profit margin for an S&P 500 company widened from 8.1 percent to 9.1 percent in the same period.

CASH HOARDING

Higher profits could help the economy if corporations plowed them back into new plants, equipment and other projects. That hasn't happened.

"Corporations have been extremely cautious in their spending in this recovery," said Maki of Barclays.

Business spending on big-ticket items like computers, industrial machinery and capital goods has remained about one-third below the average in previous recoveries, Harris estimates.

Instead, companies have stockpiled a record $1.8 trillion in cash, according to the Fed, up nearly 10 percent since the recession ended in 2009. And thanks to the Fed's drive to keep rates low, big companies have been able to borrow cheaply and replace their higher-cost debt.

All that has bolstered corporate finances and helped boost stock prices even though companies remain reluctant to expand.

Improved finances are "great for the company and its stock price, but from the point of view of the broader economy, you'd prefer they use the money to hire more workers and invest in more projects," Harris said.

Why are companies holding back?

Economists say chronic budget fights in Washington and Europe's financial crisis have left executives uncertain about the economy and reluctant to commit to big projects. So have the uncertain consequences of the Obama administration's health care law, said Mark Vitner, an economist at Wells Fargo Securities.

GLOBALIZATION

Rising international competition has lowered wages as a share of the economy in most developed countries, according to the Organization of Economic Cooperation and Development, a think tank in Paris. About one-tenth of the decline is due to competition from lower-wage countries, the OECD found.

And big U.S. companies are earning a larger share of their sales and profits overseas than in previous decades. That means their profits and stock prices can grow even when growth in the United States is weak.

Apple produced 58 percent of its sales outside the country in its 2013 fiscal year. ExxonMobil, the world's largest company, earned about 67 percent of its sales outside the United States in its 2012 fiscal year.

Nearly half of all sales earned by companies in the S&P 500 index — 46.6 percent — are produced outside the United States. In 2003, the figure was 41.8 percent.

Aswath Damodaran, a professor of finance at New York University's Stern School of Business, noted that the trend is a global one.

Many Indian companies have fared well in recent years even as India's economy has slowed. French luxury goods company LVMH did only a tenth of its sales in France in 2013.

"It used to be that U.S. companies lived off the U.S. economy and French stocks lived off the French economy," Damodaran said. "Now, stock markets are more reflections of the global economy."

 

Comments

coasterfan

This isn't exactly news. Everyone knows that the rich don't create many jobs, nor do they allow their wealth to "trickle down". What they ARE good at is hoarding their wealth. It's a rather short-sighted strategy, since the economy is driven by the middle class' ability to buy things, and right now, the middle class can't afford to buy things. Henry Ford understood this: if he didn't pay his workers a fair wage, they wouldn't be able to buy the cars they helped to build.

KnuckleDragger

Coming from a guy who has spent his whole life living off tax dollars, I don't take much stuck in your uneducated opinion. Anyone who believes that the rich don't create jobs is an idiot. Tell me how many poor people you know that own businesses and employ people. I don't expect an intelligent answer, because you aren't capable of one. As for the middle class not being able to buy things, you are sadly mistaken. My wife and I purchased more items this year than ever, including a new RV and a vehicle.

The Big Dog's back

hero zone is poor and he owns a business.

grumpy

Exactly what does the "wealthy" do with their money? If they "hoard" their money by putting it in their mattresses you would have a point, and be correct. Since they buy stuff, thus need someone to make that stuff, invest in companies, thus making jobs in those companies, it is rather easy to show you have no knowledge on how economics work. The money stays in the circulation and not in someone's mattress.

The Bizness

Supply side economics has never been proven to work.

In the past when the wealthy payed higher taxes our economy has prospered, and in the past when the wealthy payed higher taxes our economy has sputtered.

In the past when the wealthy payed lower taxes our economy did well, and in the past when then wealthy payed lower taxes our economy was hell.

grumpy

Yes it is always good when the "wealthy are taxed more, especially when the gov't targets luxury items... except it doesn't... as shown here:

http://www.wsbradio.com/weblogs/...

In case you don't like that source, how about NYT? I can add many more that tell of the foolishness of the federal gov't tax increase to "spread the wealth around". Just search "1990 luxury tax."

http://www.nytimes.com/1992/02/0...

Just one example of what happens when gov't tries to spread the money around. it kills the industries that provide jobs to the middle class. Is this an example of how trickle down doesn't work? Thus proving "trickle down has never been proven to work"? Private aircraft, private yahts, jewelry, furs, and those who work in those industries... I should say USED to work in those industries would disagree with your statement. The wealthy just went elsewhere to buy their goods, and spread the trickle down outside the US. Thanks to the federal gov't. Another reason states should do more and the federal gov't less. Thanks for being an example.

The Bizness

I am talking about taxing profits the wealthy earn, not taxing what the wealthy purchase.

grumpy

As is obvious by reading my post, I was showing what trickle down is, and how it works. I don't care what the wealthy earn, I am more concerned that the middle class has jobs, and showing that the wealthy buy things that the middle class make, thus have decent paying jobs. There is no limit as to how big the pie is, so how much someone else makes doesn't affect what I make, in fact it might just help when they buy something I either make, transport, or sell, or have anything to do with the manufactutuer of the object down to the raw materials.

You would have a point if the pie was stagnet and not able to grow, but as is shown by the Fed printing $85 billion per month... the pie does not stay the same size. The middle class and poor might get a smaller percent of the pie but when the pie is bigger the piece the middle class makes is now larger than it was. A bunny rabbit doesn't need as much food as a cow, which doesn't need as much as an elephant. Why would the bunny or cow care how much the elephant got?

The Bizness

Supply side economics has never been proven to work consistently, that is my point.

KnuckleDragger

First it doesn't work, now it doesn't work consistently. You don't know what you are talking about. The truth is that all economic theories depend on certain conditions and variables to exist in order to work. If those conditions and variables are not present the theory won't work. In fact all economic theories in use today have never been proven to be consistent. Look up the definition of theory and you will have your answer.

The Bizness

As I said in my original comment, if you read it, cutting taxes to the rich had times of economic growth and times of economic slow downs.

it has never been proven to work.

The Bizness

Btw i know what i am talking about, as much as you know. Even economic professors would argue either side of this.

grumpy

But econ profs would know that you can't focus on one element of the economy and state that is the only thing affecting the overall economy. There are many things intertwined in the economy and one single element can't be PROVEN to be the ONLY reason. It is NOT math, it is theory.

The Bizness

I am well aware, it is theory and opinion, my opinion is that I don't like supply side economics because it hasn't been shown to work. Your opinion is opposite, and I appreciate your opinion.

grumpy

What you said was that supply side economics has never been proven to work. I simply showed one case where it did. Now you add the caveat of consistently after the fact... much like obama on obamacare and that you can keep you plan if you like it, period... you can keep your doctor, period. It would be nice if you didn't move the goal post after the rules were written. Words mean things... period.

The Bizness

As I said in my original comment, if you read it, cutting taxes to the rich had times of economic growth and times of economic slow downs.

it has never been proven to work. I will say this again, I was talking about taxing income, not taxing purchases.

Your argument is only talking about purchases.

grumpy

Can you tell me how it can be proven either to work or not to work? Can you prove that other things don't affect the economy... other than cutting taxes? Can you prove that raising taxes is good for the economy... and that nothing else had an affect on the economy? You can't "prove" any one thing is the only thing that affects an economy.

Can you prove that raising taxes on any one group is good for the economy... and that NOTHING else affected that economy? "Proof" in an economic theory is not possible. You can't focus on one single part of it, they are all connected. Change one part and it affects many other parts, which then affects many more. It is NOT math. It is a guess, hence it is called economic theory.

shucks

footnote:

"Supply-side economics is better known to some as "Reaganomics," or the "trickle-down" policy espoused by 40th U.S. President Ronald Reagan. "

mikesee

Right on grumpy.

mikesee

They have been stockpiling their cash as they know Obama has created a path of financial ruin for this country and they will have to pay to "right" the ship.

shucks

rubbish

mikesee

shizdrop, you are full of rubbish. Just wondering why UAW was a cryin about the $63 per employee tax they now have to pay because of obamacare. Somebody has to pay for it. It is a fact that Obama has us on the brink of financial disaster.

shucks

mikeblind,

Your response is weird to figure out. I'll answer the part that makes the most sense >

"It is a fact that Obama has us on the brink of financial disaster."
.......Blame Republicans and Tea tards for that.

grumpy

Next year when companies will have to implement obamacare, will we see the same thing happen to those companies having to comply with the new requirements? Will the costs also go up as the regulations require more things to be covered? If so the costs will be passed onto the workers, either in fewer or lower raises, increased co-payment for the workers, higher limits to reach before insurance kick in. TANSTAAFL. There ain't no such thing as a free lunch. Someone will pay and it won't be the companies, they will simply pass it on, this time to the workers instead of the customers. If the companies take the loss their profits will fall, their stock will fall and their ability to borrow will be more expensive, thus lowering their profit more, thus lowering their stock value, thus making the cost of borrowing more.... That is why the costs are passed on.

Really are you ...

What is killing us? Big companies seeking places to pay lower wages, big company tax break loopholes. To the big companies, thank you for using the bailout to create more jobs. Robotics just isn't good enough to lower manpower. Too big to fail banks, you are welcome for the bailout on your lack lust lending practices. How about all of this mess related to high fuel prices. What a joke congress has been lately. Giving their States people, false, hope and then running on their own agenda's. Obamacare?

We need more family wage jobs. Big companies have got their big lawyers bending rules, and lobbyists funding congress. We can rarely count on big companies supporting a middle class family with family wage jobs anymore. Who is going to create the new family wage jobs? Not the monetarily wealthy!

KnuckleDragger

So tell me union dolt, just how big of a family should a family wage support? 2, 5, 20? If you can't support a family I have a novel idea for you, keep your pants zipped up!!!

grumpy

Since different states even different areas in said states have much different costs of living you would be damning Cali, New York and many other areas to losing much of their established businesses if what you say would be true. The "greedy" corporations and companies would flock to the states with lower costs of living. But since that hasn't happened, either your premise is wrong or corporations stay or move for different reasons than what you are stating, they DON'T only go where wages are cheapest. There are many reasons why companies move or stay, wages is only a part of it.

Sorry I meant to reply to Really are you instead of Knuckle Dragger.

OMG.LOL.WT_

GREED is GOOD :) :)

Pete

"Instead, companies have stockpiled a record $1.8 trillion in cash"

That would only cover 10.58% of the national debt.

And only cover about 26% what Obie the Clueless has accumulated in his 5 years in office.

Sad...

grumpy

The companies "stockpile of cash" is not locked in a safe somewhere in the basement. It is invested in something making the company interest. If they thought they could make more by expanding they would expand or hire more people. But for them to do so the demand for their product would have to increase and/or the companies would have to beleive the gov't won't throw in more regulations they have to comply with, or at least KNOW what those regulations might just be. Till something changes they will sit on their money and invest it where they feel they can make the most profit from. They are not the gov't who can just borrow more money no matter what. That doesn't happen in the real world, at least it won't happen without bankruptcy, cept for Chrysler or GM or goldman sachs, or something else the federal gov't deems too big to fail. Even more reasons the States should have a bigger role and the federal gov't a smaller one, states can't run deficits, or at least the vast majority can't.

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