It's All Uphill From Here for Corporate America
(Bloomberg Opinion) -- Wall Street seers expect the benchmark S&P 500 Index to generate earnings per share that are up 46% this year from 2020’s depressed level, with growth decelerating to 8% in 2022, according to data compiled by Bloomberg. Even that lower number for the coming year may be too rosy.
Covid-19 isn’t going away, as shown by the fast-spreading omicron variant, and renewed restrictions are possible. After enticing consumers to buy early in the holiday season, retailers will be swamped by all those shiploads of goods from Asia that are waiting to unload. An old-fashioned inventory cycle with liquidation sales and production cuts is likely early in the new year. Plus, the Federal Reserve is swiftly tapering its bond purchases in preparation for higher interest rates in a matter of months.
Even more important to the outlook for the economy and markets is the shifting of the economic pendulum from helping profits for three decades to aiding labor. From 1982 to 2012, corporate earnings absorbed almost all the 2.2% annual rise in productivity, boosting profits’ share of national income from 7.9% to 13.9%. Yet, real wages rose just 0.2% annually and labor compensation’s share fell from 66.8% to 61.8%. But from late 2012 until the pandemic disrupted everything, real earnings rose 1.8% annually, faster than the 1.3% growth in productivity. This and other forces have pushed compensation’s share of national income up to 67.8% while profits’ portion dropped to 11.3%.
The pressures favoring labor will persist. The pandemic spurred worker demands for more independence and higher pay. Labor participation rates dropped sharply in 2020 when the economy essentially closed but have not recovered to 2019 levels. Some 11 million job openings vastly exceed the 6.9 million unemployed. Many remain on the sidelines because they fear being infected by Covid-19. Mothers remain at home for lack of child-care providers. Daycare workers declined by 108,700, or 10.4%, from February 2020 through September 2021. Many have rethought their lifestyle and thrown in the work towel after commuting time jumped by 6% between 2014 and 2019, according to the Census Bureau. The pandemic generated a surge in retirees, with 1.5 million more leaving full-time employment since 2020 than the past trend implied.
Changes in labor markets with high employee longevity can take months or even years to be felt fully, but pressures are reflected quicker in those with traditionally high turnover. Quit rates in leisure and hospitality and in food service leaped to nearly 6% in October and wages jumped by 13.4% in November from a year earlier. These are canaries in the labor market coal mine, harbingers of unfolding trends that may spread to manufacturing, with a 2.3% quit rate and 4.9% wage increase, and to financial activities, where the quit rate is 1.5% and wages are rising 4.3%.
Private sector labor unions are pressing for more compensation as they take advantage of current tight labor markets. Starbucks Corp. workers in Buffalo recently became the first among 9,000 company-owned stores to unionize and others are likely to follow. Cost-of-living adjustments, designed to keep wages abreast with inflation, are reappearing after a 40- to 50-year absence. General Mills Inc. said that in its fiscal third quarter, sales rose 5% from a year earlier, due entirely to price increases but not enough to offset rising costs. Its gross margins fell a substantial four percentage points to 32.5%.
Kellogg Co.’s agreement to settle a two-and-a-half-month strike by its workers included a COLA. Deere & Co.’s new contract with workers adjust wages every quarter to match inflation. Minimum-wage workers will get pay increases reflecting higher living costs in states including Arizona, Colorado, Maine, Minnesota, Montana, Ohio, Washington and South Dakota, according to an analysis by the National Conference of State Legislatures. Almost 70% of Americans now approve of labor unions, according to an August survey by Gallup, the highest in 50 years.
Global supply chains are cost-effective, but as we’ve seen recently, their many links make them vulnerable to breakage. The lasting effects of supply-chain disruptions will include more domestic production of components and final products. Inventories will also expand as just-in-time production strategies are discredited. The net effect will be increased business costs, to the detriment of profits but to the advantage of more well-paid American jobs. This may reverse, at least partially, the devastating effects of globalization on highly-paid U.S. manufacturing employment.
Government policy now backs labor. The Biden administration and other Democrats are keen to redistribute income from higher-income to lower -income households. The proposal to increase the national minimum wage from $7.25 to $15 per hour is aimed at reversing income inequality. So, too, is Biden’s call for restrictions on non-compete clauses, arguing that they impede worker mobility and, hence, higher pay. Democrats’ proposals to lower the age for Medicare from 65 to 60 is also a method of income redistribution since it could push up wages as early retirements enhance the economic power of those still working. This would magnify the pandemic-inspired early retirement trend.
American business probably can’t reverse the ongoing shift from corporate profits to labor compensation, but it is fighting back. It has cut costs and used labor more efficiently recently. Since the economic bottom in the second quarter of 2020, real gross domestic product is up 12.8% and 2.7% above the level of 2020’s first quarter, but nonfarm payrolls have only recovered 10.3% and are still 2.9% below the pre-pandemic level.
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Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” Some portfolios he manages invest in currencies and commodities.
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