Rising Labor Costs ‘Very Bad News for Profits’: Chart of the Day

U.S. companies have reached a “tipping point” that will shrink earnings growth and profit margins, according to Albert Edwards, a global strategist at Societe Generale.

The shift has occurred because labor costs have started rising faster than prices as the economy struggles to expand, Edwards wrote yesterday in a report.

The CHART OF THE DAY illustrates how he reached this conclusion: by comparing the year-to-year percentage changes in unit labor costs and a business-price deflator. Both indicators are compiled by the Labor Department.

Average labor expense for every unit of output increased 1.9 percent last quarter from a year earlier, while the deflator for businesses other than farms rose 1.8 percent. The labor-cost gauge climbed more than prices for the first time since 2008.

“That is very bad news for profits,” Edwards wrote. It’s also “bad news for equities” and for the Federal Reserve, which may have to deal with accelerating inflation as companies seek to maintain margins by raising prices, he added.

Edwards has predicted the Standard & Poor’s 500 Index will drop to 400, a 66 percent plunge from yesterday’s close. He has also called for the yield on 10-year Treasury notes to drop to 1.5 percent, down from 1.97 percent yesterday.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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