Data released by the BEA showed before tax domestic corporate profits rising 5.7% sequentially in Q2 (or 25% at an annualized rate). This was the first back-to-back increase in national accounts earnings in three years.
Unlike Q1 the rise was not confined to financials: the nonfinancial sector accounted for roughly half of the growth recorded. This is a very important development since standard economic theory suggests that a firm calculates the employment level where the marginal cost of hiring (wage rate) is equal to the marginal revenue from that increased hire. In other words, no profits, no hiring.
At this juncture, most economists are skeptical about the prospects for a rapid return to job creation in the U.S. After all, even though profits resumed soon after the end of the 2001 recession, firms continued to reduce headcounts for 23 months (a “job-loss” recovery). Why would it be different this time around?
The answer is profit margins. We believe that the hiring decision of firms is also conditional on a given level of profitability. As today’s Hot Chart shows, it took no less than two years after the start of the 2001 recovery to restore profit margins to a level that is generally conducive to job creation. As shown, this is not the case this time around as margins remain higher than usual at this stage of the cycle. For this reason, we think that job creation will resume this fall.
National Bank Financial
The above uses national accounts. S&P; 500 companies (the largest companies in the US economy) are showing margins that are lower than in 2001-02 and still falling.
S&P; 500 Composite Net Margin
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- RBS Posts Loss, Takes Dim View on Recovery
- Fed’s Yellen sees ‘frustratingly tepid’ recovery
- Equity Pullbacks Are Part of Every Recovery Year
- American Institute of Architects: Recovery has stalled
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