Jamie McGeever
Orlando, Fla. (Reuters) – While the Fed and other central banks are obsessed with avoiding 1950s-style “wage-price” spiral, with US GDP data last week showing a more subtle risk of persistently high inflation.
Call it a “profit-price” spiral.
In many ways, the U.S. labor market is as strong as it has been in decades. Since labor is the single largest input in a business’s total cost, policymakers are right to worry that “excessive” wage demand could trigger or even accelerate inflation.
But viewed through the prism of profits, corporate America is also in terrible health, especially big business. In the second quarter of this year, U.S. corporate profits hit an all-time high, or near their highest level in more than half a century.
This is an inflation threat as well, but we’re hearing far less from policymakers than the risk of a payroll growth price spiral that would only be swept away by former Fed chair Paul Volcker (Paul Volcker) Early managed interest rate rise smashed 1980s.
The struggle between labor and capital, past share of capital in national income Getting bigger and bigger 27 years, this is not a new problem, certainly not politically.
But with inflation at a four-year high, it is becoming a policy-making challenge that the Fed must embrace, said Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisers.
“I’m pretty sure that higher corporate profits would indirectly encourage the Fed to raise interest rates. In terms of rising prices everywhere and corporate profits staying high, that’s a direct corollary to higher inflation,” He says.
US corporate profits as a percentage of GDP in the second quarter rose to 15.15%, close to the highest level since 25. During the same period, the profit margin of non-financial enterprises rose to .5%, and fell all the way, approaching the high point of last year to . them.
Perhaps less surprisingly, second-quarter nominal profits were the highest ever. Still, breaking the $2 trillion barrier is noteworthy.
Graph: US Corporate Profit Margin (https://inew.news/wp-content/uploads/2022/09/localimages/USCorpProfitMargins.jpg)
Graph: US corporate profits as a share of GDP (https://inew.news/wp-content/uploads/2022/09/localimages/CorpProfit1.jpg)
Chart: US non-financial corporate profits exceed $2 trillion (https://inew.news/wp-content/uploads/2022/09/localimages/CorpProfits2.png)
At the same time, labor market conditions in the United States are also the tightest in decades. The unemployment rate was last lower than today’s 3.5% more than half a century ago, with two job openings for every unemployed person.
While the likelihood of worker strikes and labor disputes in the U.S. is lower than in Europe, Fed officials don’t welcome wage growth that matches inflation, much less than it exceeds.
They would argue that this would have one of two consequences, both of which would be contrary to their dual mandate of price stability: higher wages passed on to consumers, leading to more High inflation; or the company just lays off staff.
Unfair burden?
Fiscal policy is better suited to curb the pricing power of U.S. companies. As noted by UC Berkeley professor and former Labor Secretary Robert Reich, the Biden administration passed a 1% tax on stock buybacks and a minimum corporate tax in the recently enacted Inflation Reduction Act.
That’s not enough, he argues, but he acknowledges that policies such as windfall taxes, price controls, higher taxes on corporations and the wealthy, and bolder antitrust enforcement are facing the U.S. Strongly disagree. Washington.
In the absence of a strong fiscal push, the onus is on the Fed to use the blunt weapon of high interest rates that cripple jobs and trigger a recession.
“It’s the only tool in the Fed’s toolbox. The problem is that it puts most of the burden of fighting inflation on ordinary working people and the poor,” Reich told Reuters.
Graph: US Real Earnings Growth (https://inew.news/wp-content/uploads/2022/09/localimages/USRealEarnings.jpg)
There’s no question that the Fed’s communications focused on the risks posed by wage pressures rather than corporate pricing.
Federal Reserve July meeting minutes 27-27 Policy meeting revealed seven references to “wage” or “wage”, 17 “labor market”, eight “jobs” or “job”, not a “profit”.
Fed Chair’s transcript Jerome Powell’s July press conference 25 Showcase mentions “wage” or “wage” nine times, 15 mentions “labor market”, 15 mentions “job” or “job” but not “profit” , ‘corporate’, ‘company’, or ‘companies’.
Maybe the economy will do it for them if Washington’s political establishment is unwilling and the Fed can’t cool the underlying price pressure on corporate profits boom.
As t slowing financial conditions will slow activity and demand, profit growth should cool and companies’ margins should fall.
“Earnings growth is slowing and heading towards zero. This means margins are under pressure, with consensus forecasts now
for margins to decline by 5% ,” equity analysts at Societe Generale (OTC: SCGLY) wrote on Thursday.
(The views expressed here are those of the author, a columnist for Reuters.)
(author Jamie McGeever; editor Andrea Ricci)
