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14 Jul. 2015 | Comments (0)
- The tightening of the labor market, leading to higher turnover and faster compensation growth, and
- Significant slowdown in labor productivity growth.
- Foremost, the surprisingly swift labor market tightening, coupled with unexpected slow productivity growth, will lead to surprisingly low corporate profits.
- This labor market tightening will lead to a faster than expected rise in the federal funds rate as the Fed will try to protect against future inflation driven by labor cost increases.
- Higher interest rates will lower corporate profits through higher borrowing costs.
- Higher interest rates will lower stock market valuations.
- The market size component of profits primarily captures the gains that are achieved by increasing the scale or quantity of production. Highly correlated with GDP growth.
- The price-wage margins component of profits depends on hourly wage growth relative to the growth in prices of business output. A slower pace of wage gains relative to output price growth contributes to profit growth.
- The Total Factor Productivity (TFP) growth component captures that portion of profits’ growth resulting from a more efficient use of labor and capital as well as effects from product innovations.
- Phase One: Early-mid expansion (green): revenues are growing rapidly, the labor market is not tight, productivity is growing rapidly, and interest rates are relatively low.
- Phase Two: Mid-late expansion (yellow): Revenues are still growing, but profits are declining. During this period revenue growth slows down as pent-up demand is exhausted. The labor market is tighter, labor cost accelerates, and interest rates are higher.
- Phase Three: Revenues recessions (gray): Revenues and profits are declining. These periods overlap, although not entirely, with official business cycle recessions.