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.
Profit
Margins
(Click on
chart to enlarge)
(Recessions
shaded)
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.)
(To be fully
informed visit http://www.beyourowneconomist.com/)
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