Thursday, June 7, 2012

Productivity and Profitability

The Lehmann Letter (SM)
Corporate profits have had an extraordinary run in the past decade. The dot-com bust of 2001, which many thought would be the demise of corporate earnings, quickly became the launching pad for a record climb.

Growth in profit margins (Profits = Profit margins X Sales volume) enabled this increase in total profits. The chart reveals that profit margins began to rise above their historic range during the dot-com boom of the 1990s, and then reached all-time highs from 2002 to 2012.

Corporations had two factors on their side: Rising productivity (efficiency) and meager wage gains. The 2008 - 2009 recession aided profit margins when workforces shrank more than output and wages consequently lagged. You can see from the chart that profit margins are at their peak.

Profit Margins

(Click on chart to enlarge)

(Recessions shaded)

Yesterday the Bureau of Labor Statistics reported that productivity (efficiency) fell in the first quarter but employees' real compensation fell even more rapidly. As a result the cost of producing a unit of output grew less rapidly than the price businesses received for that output. The result: Profit margins remain at historic highs.

In Sum: Falling compensation more than offset falling productivity (efficiency), maintaining profit margins at record levels. Business continues to enjoy an extraordinary era.
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© 2012 Michael B. Lehmann

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