Deutsche Bank strategist Jim Reid notes in a recent report that U.S. corporate profits, the budget and trade deficits are near historic or, in the case of profits and asset prices, all-time highs, while wages are near their lowest when measured as a share of gross domestic product. Since the end of World War II to around 2000, U.S. profits largely ranged between 5% to 7% of GDP, but since the 2008-09 financial crisis they’ve climbed to about 11%. There are multiple possible explanations for those higher profits, Reid said. Corporate tax cuts and globalization, which offers U.S. firms a wider source of profits that are harder for any government to tax, are helping corporations to post higher profits. Relatively low interest rates thanks to a global savings glut, and then quantitative easing by major central banks, also help corporates by lowering their borrowing costs. Many U.S. corporations also converted much of their short-term revolving credit into long-term debt while interest rates were low, they didn’t feel much pain as yields rose over the last three years, he added.
At same time as U.S. corporate profits are at an all-time high, wages paid to workers are at around a historically low share of GDP. According to the Federal Reserve Bank of St. Louis, wages and salaries comprised approximately 51.7% of the US GDP. This figure, which includes wages and salaries, employer-paid benefits like pensions and insurance, and government social insurance like Social Security and Medicare, is down from 58.5% in 1970. This decline is also seen across the global economy, from India to the more established economies of the E.U. This decline in the labor share implies that the gains from economic growth are not being shared equally between workers and capital owners.
In further bad news for many U.S. households, the number public companies listed on U.S. stock exchanges has declined, while the number of private equity-backed companies in the U.S. has increased significantly in the past 25 years. This trend can have negative effects on everyday Americans, as public markets are a great wealth generator for Main Street investors trying to meet their investment and retirement needs. When fewer companies go public, more of the profit and financial reward is kept by private investors, who tend to be wealthier. So, a reduction in the public listing of companies runs the risk of even further increasing income disparity.
Discussion Questions:
1. Explain how profits are a reward for either starting and running a business and discuss what can explain the recent growth, as a share of GDP, in U.S. corporate profits.
2. Discuss both domestic and global trends that can help explain the simultaneous increase in profits and reduction in worker compensation (as a portion of GDP).
Sources| Morning Star: https://www.morningstar.com/news/marketwatch/20250205131/corporate-profits-are-near-all-time-highs-while-wages-are-near-lows-how-long-can-this-last; NASDAQ: https://www.nasdaq.com/newsroom/capital-formation-stronger-economy-qa-nasdaqs-john-zecca; FRED St. Louis: https://fred.stlouisfed.org/series/A4002E1A156NBEA; Unsplash: Photo by Deon van Zyl on Unsplash