• 824 days Will The ECB Continue To Hike Rates?
  • 824 days Forbes: Aramco Remains Largest Company In The Middle East
  • 826 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 1,226 days Could Crypto Overtake Traditional Investment?
  • 1,231 days Americans Still Quitting Jobs At Record Pace
  • 1,233 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 1,236 days Is The Dollar Too Strong?
  • 1,236 days Big Tech Disappoints Investors on Earnings Calls
  • 1,237 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 1,239 days China Is Quietly Trying To Distance Itself From Russia
  • 1,239 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 1,243 days Crypto Investors Won Big In 2021
  • 1,243 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 1,244 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 1,246 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 1,247 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 1,250 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 1,251 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 1,251 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 1,253 days Are NFTs About To Take Over Gaming?
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

What's Behind The Global EV Sales Slowdown?

What's Behind The Global EV Sales Slowdown?

An economic slowdown in many…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

  1. Home
  2. Markets
  3. Other

3Q Labor Cost Data Point To Weak Profit Growth

In addition to revisions to third-quarter GDP data, the Commerce Department will release its first estimate of third-quarter corporate profits tomorrow, November 29. As Chart 1 shows, quarter-to-quarter profit growth slowed sharply in the second quarter - to 1.45% from 12.60% in the first quarter. Based on third-quarter labor cost data, I suspect that third-quarter corporate profit growth, measured sequentially, will remain tepid, at best. On a year-over-year basis, however, corporate profit growth is likely to appear rosier given the Katrina-depressed profits in the third quarter of 2005.

Chart 1

Here's the explanation. Chart 2 shows that in 2006, unit labor costs in the nonfarm business sector are now consistently growing faster than the prices nonfarm businesses receive for their goods and services. It can be shown algebraically that growth in the implicit price deflator for nonfarm business output minus growth in nonfarm business labor unit costs is equivalent to the gross revenues of nonfarm businesses minus their total labor costs.

Chart 2

Because labor costs account for the majority of production costs in the United States, rising growth in labor costs relative to the growth in total revenues would be expected to have a negative impact on corporate profits. And, in fact, this is exactly what the historical record shows, as demonstrated in Chart 3. Using annual average data, the contemporaneous correlation between these two series is 0.69 out of a possible 1.00. With unit labor costs rising relative to selling prices and with sales volumes slowing, it is difficult to see how corporate profit growth in the near-term can be very strong. And if profit growth slows, where will corporations get the funds to continue "retiring" equity at a record pace - a factor supporting share prices and household deficit pending?

Chart 3

 

Back to homepage

Leave a comment

Leave a comment