Jamie McGiver
Orlando, Fla., Sept. 1 (Reuters) – While the Federal Reserve and other central banks are obsessed with avoiding a 1970s-style “wage-price” spiral, last week’s US GDP data made the risk of inflation remaining high more nuanced. showed that
Call it the “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 to a firm’s total cost, policymakers are right to be concerned that “excessive” wage demands could trigger and even accelerate inflation.
But looking through the prism of profits, American companies, especially the big ones, are in pretty good shape. In the second quarter of this year, US companies made profits, depending on the amount of cuts, at all-time highs or close to levels not seen more than half a century ago.
This is also the threat of inflation, but we hear more about it from policymakers than the risk of wages accelerating a price spiral that could only be crushed by rising interest rates like those managed by former Fed Chairman Paul Volcker in the early 1980s. There are far fewer.
The battle between labor and capital, which has seen an ever-increasing share of capital in national income over the past three decades, is not a new issue, politically as well.
But with inflation at its highest level in 40 years, it has emerged as a policymaking challenge for the Fed to address, said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance. .
“I believe that rising corporate profits are indirectly pushing the Fed to raise interest rates. It’s a consequence,” he said.
As a share of GDP, US corporate profits rose to 12.25% in the second quarter, nearing the highest level since 1950. Non-financial corporate profit margins rose to 15.5% over the same period, nearing last year’s peak. It dates back to the 1960s.
Not surprisingly, second quarter nominal earnings were the best ever. Still, it’s worth noting that the $2 trillion barrier has been breached.
This comes at a time when conditions in the U.S. labor market are among the tightest in decades. More than half a century ago, the unemployment rate was lower than he is today at 3.5%, and he has two job openings for every unemployed person.
Worker strikes and unrest are less likely in the United States than in Europe, but Fed officials don’t welcome wage growth that matches or exceeds inflation.
They would argue that this would have one of two consequences, both of which violate the double duty of price stability: higher wages would be passed on to consumers, leading to even higher inflation, or Companies simply cut headcount.
undue burden?
Fiscal policy is better suited to curb the pricing power of US companies. As UC Berkeley professor and former Secretary of Labor Robert Reich, The Biden administration imposed a 1% tax on share buybacks and imposed a minimum corporate tax in the recently enacted Inflation Reduction Act.
This is not enough, he argues, but policies such as a windfall profit tax, price controls, higher taxes on corporations and the wealthy, and bolder antitrust enforcement face strong opposition in Washington. I am aware of
Without strong fiscal support, the Fed is responsible for using the blunt weapon of cutting jobs and sowing the seeds of a recession. higher interest rates.
“This is the only tool in the Fed’s toolkit. The problem is that it places most of the burden of fighting inflation on the average worker and the poor.” Reich told Reuters.
there is little doubt The Fed’s communications focus less on corporate pricing and more on the risks posed by wage pressures.
In the minutes of the Fed’s July 26-27 policy meeting, there were seven mentions of “wages” or “wages,” 17 of “labor markets,” and eight of “work” or “work,” There was not a single mention of ‘benefits’.
The transcript of Fed Chairman Jerome Powell’s press conference on July 27 contains nine references to “wages” or “wages,” 38 references to “labor market,” and 38 references to “work” or “work.” is shown 15 times, but there is not a single mention of “profit”. ‘, ‘corporate’, ‘company’, or ‘companys’.
If Washington’s political system is unwilling and the Fed can’t cool the potential price pressures of a corporate profit boom, perhaps the economy will do it for them.
Earnings growth should slow and corporate profit margins should decline as tighter financial conditions slow activity and demand.
Equity analysts at Societe Generale said Thursday that “earnings growth has slowed and is heading towards zero. This means pressure on profit margins, with consensus now predicting a 5% decline in 2022. ‘ wrote.
(Opinions expressed here are those of the author, a Reuters columnist.)
Profit margins for US companies https://tmsnrt.rs/3q0lH5G
US corporate profits as a percentage of GDP https://tmsnrt.rs/3pXmlAH
US non-financial corporate profits top $2 trillion https://tmsnrt.rs/3RnWxt5
US Real Income Growth https://tmsnrt.rs/3AzTgA9
(Written by Jamie McGeever, edited by Andrea Ricci)
((jamie.mcgeever@thomsonreuters.com; +1 (407) 288-5607; Reuters message: jamie.mcgeever.reuters.com@reuters.net))
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