The Lehmann Letter (SM)
The Bureau of Labor Statistics announced this morning that labor productivity had fallen by 0.5% in the first quarter because hours worked had increased more than output.
This is understandable at this stage of the economic expansion: Employers typically have resumed hiring and there is the risk that they will add labor more rapidly than output grows.
If you dig deeper into the report you will also discover evidence that the growth in profit margins has stalled.
(Click on chart to enlarge)
The chart vividly portrays profit margins' long-term growth since 1990. After a setback at the end of the dot-com boom in the late 1990s, profit margins have expanded especially rapidly since 2000. Now they are at an all-time high.
Can we expect them to grow to the sky like Jack's beanstalk? No, we can't. For a decade, from 2000 to 2010, employers boosted output more rapidly than they hired labor. This was especially true during and in the aftermath of the recent recession. Businesses had reduced employment by more than output had fallen. Output per hour grew, swelling profit margins. Today profit margins stand at the record levels mentioned above.
Meanwhile total corporate earnings (the product of profit margins multiplied by sales volume) more than doubled since 2000 and have recovered all of their recession losses. This was largely due to the sharp jump in profit margins analyzed in the paragraph above. If the growth in profit margins has now stalled, growing sales volume must drive all future gains in total earnings. That is not likely to occur as the economy recovers slowly.
We should therefore expect a slowdown in earnings growth. That doesn't augur well for the stock market.
(Correction: Yesterday's post mistakenly referred to "unemployment" when it should have referred to "employment." That error has been corrected.)
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