Although unemployment remains stubbornly high and wage increases are scarce, corporate profits are holding up remarkably well.
They are taking a larger share of our GNP than before the recession ten years ago. Also, the gap between workers’ pay and corporate profits is almost without precedent.
These trends are unique to our part of the world. In other nations, notably in Europe and Japan, corporate profits have not recovered to their pre-recession levels.
There is an old ritual nowadays where analysts’ estimates usually are far from upbeat, but when the reports are released, and the results more often than not are exceeded, presumably the investment community is pleased.
Nevertheless, the tide is turning. Forecasts for the current year are being steadily revised down. There remains the question as to the reasons profits have been as buoyant as has been the case in view of the sluggish economic environment.
Firms in North America have been quick to layoff workers once the business recession became evident. There also is the fact that labour, particularly south of the border, has lost much of its bargaining power. This has been accentuated by the entry of nations like China into the world economy.
Companies have moved their production to low-wage nations, and thus resist demands from domestic sources to raise wages.
Then too, the high return on capital inevitably will encourage a wave of investment; the resulting expansion of output will lower costs. So far that has not taken place, but is certain to occur in the future.
In the interim the business contraction led companies to make strenuous efforts to increase productivity. The higher profits did not entail wage gains as too few companies are altruistic. That trend breeds resentment and does not continue indefinitely.
Andrew Smith, of the British consulting firm Smithers & Co., argues that incentives are to blame for these trends).
Managers are motivated by share options and share prices are driven by earnings per share. Spending cash on more buy backs boosts earnings per share, whereas capital investment programs may actually reduce earnings per share in the short run.
However executives are only interested in the period of their term of office.
Clearly, that approach is bad for the economy and for the company, although temporarily it sustains profits.
It surely is far better for profits to fall because businesses are engaged in investment programs than because executives are cautious about sending the economy into a slump.