Corporate profits had every reason to disappoint in 2013. Weak economic growth in the U.S and abroad, minimal gains in productivity, and low inflation (which kept companies from raising prices) should have all combined to drag down earnings. But according to estimates by Goldman Sachs (GS) chief economist Jan Hatzius, after-tax corporate earnings grew by as much as 11 percent per share last year. A “remarkably strong performance,” Hatzius wrote in a Jan. 22 note to clients.
How could that be? Simple, says Hatzius: U.S. workers didn’t get much of a raise in 2013, leaving more profits left over for shareholders. Overall, hourly wages grew by just 2 percent last year, five times slower than corporate profits. Luckily for workers, inflation remains below 2 percent, meaning that extra income increased their buying power, rather than getting eaten up by higher prices. Still, given how fat corporate profits are, that’s a minor victory for workers, who (we’ve recently learned) are no more upwardly mobile than they were 50 years ago. Yikes.
Looking ahead, Hatzius sees more of the same in 2014: high profits, sluggish wages. Goldman’s official estimate is for gross domestic product to average 3.5 percent growth through the final three quarters of 2014. That should help companies sell more stuff. Toss in what Hatzius believes will be a rebound in worker productivity this year, and companies should be able to increase sales without having to incur big increases in labor costs. As a result, he expects corporate profits to accelerate this year.
The equation won’t fundamentally change until wages grow by around 4 percent, Hatzius writes. The question is: What will drive that? Stalled productivity growth in 2013 didn’t help, though it did lead companies to hire more workers in 2013, soaking up some slack in the labor market. Still, lots of those jobs were in low-wage sectors.
The best way for wages to grow is for the labor market to tighten up, reducing the number of available workers per job opening. Although Hatzius thinks we’re still at least a year away from that point, other economists actually think we’re on the verge of a big boost in wage growth. Paul Ashworth, chief U.S. economist at Capital Economics, wrote a note to clients Thursday morning titled, “Reasons Why Wage Growth Is Poised to Take Off.”
Ashworth pins his optimism on the continued decline in the unemployment rate, but also points to a handful of other reasons to think wages are about to pop: People are quitting their jobs at a faster rate, an indication that they’re leaving for better-paying jobs. Also, according to the Conference Board’s consumer confidence survey, more people report that jobs are becoming more plentiful, and fewer say jobs are harder to find. Ashworth also cites evidence that small businesses increasingly report that they plan to increase wages.
That all sounds good. But it feels as if we’ve heard these anecdotes before. In other words: Believe it when you see it. Not that wages and corporate earnings can’t both post solid gains in 2014, but in the battle between them, my money’s on the corporations to wind up with a bigger share of that money than workers do.