Average hourly earnings and hourly compensation data do not point to a squeeze on margins, for now.
Nevertheless, the latest productivity & costs report for Q3 offered a warning. Non-farm business unit labour costs jumped 8.3% q/q (annualised). The y/y rebounded from +0.1% in Q2 to +4.8%.
This was due mostly to a drop in productivity: and the data on output per hour can be erratic (-5.0% q/q annualised in Q3). The y/y rate for output per hour turned negative again.
The rise in the stock market suggests investors believe the rise in unit labour costs will be mitigated by productivity gains: companies have invested heavily since the outbreak of the pandemic.
The profit numbers would appear to support this view, with corporate profits before tax (with IVA & CCAdj) hitting a new high of $2.8192tr (annualised rate) in Q2.
This corroborates the S&P 500 data on profit margins, which have propelled the equity market to all-time highs. There is no doubt that large caps maintain considerable pricing power.
This may not be the case for smaller companies, however. NIPA corporate profits show a very different trend when ‘subsidies’ are subtracted from the headline measure of profits (before tax, with IVA & CCAdj). Profits (excluding the impact of subsidies) declined by an annualised 5.7% q/q in Q2 and are 9.0% below Q4 2019 levels.
Summary
- Unit labour costs jump in Q3
- Subsidies to businesses still substantial
- Corporate profits ex-subsidies fell in Q2
