PROTECTIONISM WON'T PROTECT US
Psst. Want the secret of business success? It's easy: high productivity and low inflation. That's the overwhelming message emanating from the fourth-quarter earnings reports of 900 companies on BUSINESS WEEK's Corporate Scoreboard. Just when Wall Street feared that the economic party was over because of Federal Reserve monetary tightening in 1994, profits leaped 71% in the fourth quarter. For the entire year, profits were up 41%--the biggest increase since BUSINESS WEEK began compiling data in 1973 (page 98).
True, some companies made money the old-fashioned way: They raised prices. Detroit, in particular, took advantage of the sharp hike in the yen and the rising cost of Japanese cars in the U.S. to post big price hikes on their autos. But the vast majority of companies couldn't pass on to consumers their higher costs for raw materials or financing. Even the few industries with pricing power didn't neglect productivity. They joined the corporate chorus singing the praises of capital investment and spent accordingly. Capital spending has been on a double-digit track for two years, and right behind it have come higher productivity and profits. Profit margins for the BUSINESS WEEK 900 widened sharply to 5.7% last year from 4.3% in 1993.
There is one more turn to take in this virtuous cycle, and that is for real wages to rise. Historically, higher wages have invariably followed higher productivity. For more than 20 years, productivity growth had been tepid at best, keeping family income stagnant. The new surge in productivity should usher in higher middle-class income. The middle class has shouldered much of the pain of downsizing and restructuring that has made Corporate America so productive and competitive in global markets. Now is the time for the middle class to share in the fruits of higher productivity.