Since the economic recovery began, corporate America went to great lengths to improve the efficiency of its operations.
The American worker knows that “improved efficiency” is largely innuendo for layoffs, longer hours, and only modest pay increases (assuming you can convince your boss to give you a raise).
So far, these efficiencies have been lucrative. Widening profit margins have enabled corporations to book fat profits on modest revenue growth.
But how long can this trend last?
Business Insider recently asked veteran strategist Gerard Minack of Minack Advisors what he considered to be the most important chart in the world.
He offered some very clear perspective on the matter.
“Consumer spending is around all-time highs as a share of U.S. GDP, while labour income is at multidecade lows,” he explained. “This has been wonderful for corporates: consumer spending boosts revenue, while labour costs are the corporate sector’s largest single cost. Rising consumer spending and falling wage share of GDP is great for profit margins.”
But this peculiar trend is obviously not sustainable.
“Now, however, further wage weakness threatens to suffocate the U.S. consumer,” he said.
You see, by keeping pay and employment low, corporations are effectively squeezing their own customers.
It might take regulatory changes. It might take tax hikes. It might take a massive destabilizing protest. But eventually, something will have to get corporations to channel some of that money back to consumers or else they risk feeling pain on their top lines.
“It now seems that what would be good for the recovery — higher labour income — will be detrimental for profit margins,” said Minack. “This may be a good year for the economy, but profits may fall short of forecasts.”
Business Insider Emails & Alerts
Site highlights each day to your inbox.