Monday, January 27, 2014

Corporate profits helped by weak employment

Weak aggregate demand has two impacts on business, one negative and one positive. The negative impacts is on the top line with weak sales leading to weak revenue growth. The positive impact is on OPEX, with a weak labor market helping to hold costs in line. So, an economy with enough demand to hold up revenue, but still weak enough to keep labor markets in check, might be great for corporate profit. Without end-customer demand to justify hiring ramps or capex outlays though, that profit would just pile up as cash.
The strength (in profits) is directly related to the weakness in hourly wages, which are still growing at just a 2% nominal pace. The weakness of wages and the resulting strength of profits are telling signs that the US labor market is still far from full employment.
The article ends on a somewhat corporate bashing note, I don't think it's reasonable to critisize corporations for trying to maximize profits, but I do agree that aggregate demand is the biggest economic issue in the US today.


Blogger Detroit Dan said...

I sense some evolution in your thinking on this issue...

I think the under consumption theory is poorly supported [winterspeak, December 2013]

I do agree that aggregate demand is the biggest economic issue in the US today [Winterspeak, January 2014]

I wonder if you are having second thoughts about Sadowski's claim that the "underconsumption" theory is unrelated to wealth and income inequality? (or whatever Sadowski was trying to say)

7:19 AM  
Blogger Charles DuBois said...

Those familiar with the Kalecki equations know that wages have little impact on profits - at the macro level. That because lower wagers also mean lower revenues - so it's basically a wash for profits. Profits have boomed importantly from the higher deficits. The higher incomes related to deficit spending gets largely spent, creating additional business revenue without an additional cost, and hence a corporate profit..

9:18 AM  
Blogger winterspeak said...

Hi Dan

No second thoughts. By "underconsumption theory" I meant the argument that rising inequality was driving down AD because the rich "underconsume". I don't find this line of thought at all convincing.

I do believe that low AD is the biggest US economic issue today, but I think it's caused primarily by the deficit being too small (taking household savings desire as a given).

9:21 AM  
Blogger Detroit Dan said...

Here's how I see things. I wonder which, if any, of the following you disagree with:

1. Underconsumption is the same thing as too low aggregate demand.

2. The wealthy have a much lower marginal propensity to consume as opposed to the middle and lower classes.

3. Profits have been helped by weak employment.

4. The vast majority of profits accrue to the wealthy.

5. Household saving desire is something of a misnomer. Saving desire increases as income increases, as consumption moves away from necessities to discretionary consumption.

Thanks for the discussion...

7:46 AM  
Blogger winterspeak said...

Hi Dan

1. AD sort of has a specific, technical meaning, but "underconsumption" is pretty context dependent on exactly what it means, so I cannot agree or disagree with this one.

2. This is a quantitative question, and it seems plausible, but I also think there was some research showing that it was not true? Regardless, some people make this argument and it seems reasonable but it's measurable so let's measure.

3. I certainly believe this is true.

4. I think they accrue to equity holders and senior enough employees who can manage their compensation directly. Senior employees are certainly wealthy, but equity includes pensions funds which include lots of people. Also entire industries, particularly finance, can extract rent from the rest of the economy.

5. Lots of things can impact savings desire, including where you are in your life, prospects for the future, etc. I think it's very real and very important. It's Keynes' "animal spirit" to be really hand-wavy about it.

9:59 AM  
Blogger Detroit Dan said...

Thanks. That's some good food for thought, esp your response to #5.

With regard to #2, Steve Waldman had some references in his recent post, Standards of Evidence. Excerpts:

"We can, for example, say that marginal propensity to consume effects are real... Milton Friedman pointed out that differing marginal propensities to consume observed in the data might have nothing at all to do with inequality... a few courageous researchers have done the work of examining in numerical detail whether the Permanent Income Hypothesis is sufficient to account for variations in spending, and the answer is always no. I’ve cited ‘em before, I’ll cite ‘em again: “Why do the rich save so much?” by Christopher Carroll; “Do the Rich Save More?”, by Karen Dynan, Jonathan Skinner, and Stephen Zeldes... OK. So inequality-related MPC effects are real."

2:51 PM  
Blogger Greg said...

I think I agree (mostly) with Dans description as demand being mostly about consumption.

Isn't consumption the other side of the coin from production? I think most agree we need more production and therefore we need more consumption too. Without the consumption won't we just have a growth of inventories and fall in prices..... leading to cutbacks in production?

It seems to many people on these econ comment threads (not necessarily you three here) consumption is a bad word, something to be discouraged. I don't get it. I guess just another casualty of supply side economics

4:42 AM  
Blogger Detroit Dan said...

Interesting column in the NYT yesterday regarding consumer demand. The Middle Class Is Steadily Eroding. Just Ask the Business World.

"As politicians and pundits in Washington continue to spar over whether economic inequality is in fact deepening, in corporate America there really is no debate at all. The post-recession reality is that the customer base for businesses that appeal to the middle class is shrinking as the top tier pulls even further away.

If there is any doubt, the speed at which companies are adapting to the new consumer landscape serves as very convincing evidence. Within top consulting firms and among Wall Street analysts, the shift is being described with a frankness more often associated with left-wing academics than business experts."

1:59 PM  

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