It's All Uphill From Here for Corporate America
Wall Street seers expect the benchmark S&P 500 Index to generate earnings per share that are up 46% this year from 2020’s depressed level, with growth decelerating to 8% in 2022, according to data compiled by Bloomberg. Even that lower number for the coming year may be too rosy.
Covid-19 isn’t going away, as shown by the fast-spreading omicron variant, and renewed restrictions are possible. After enticing consumers to buy early in the holiday season, retailers will be swamped by all those shiploads of goods from Asia that are waiting to unload. An old-fashioned inventory cycle with liquidation sales and production cuts is likely early in the new year. Plus, the Federal Reserve is swiftly tapering its bond purchases in preparation for higher interest rates in a matter of months.
Even more important to the outlook for the economy and markets is the shifting of the economic pendulum from helping profits for three decades to aiding labor. From 1982 to 2012, corporate earnings absorbed almost all the 2.2% annual rise in productivity, boosting profits’ share of national income from 7.9% to 13.9%. Yet, real wages rose just 0.2% annually and labor compensation’s share fell from 66.8% to 61.8%. But from late 2012 until the pandemic disrupted everything, real earnings rose 1.8% annually, faster than the 1.3% growth in productivity. This and other forces have pushed compensation’s share of national income up to 67.8% while profits’ portion dropped to 11.3%.
The pressures favoring labor will persist. The pandemic spurred worker demands for more independence and higher pay. Labor participation rates dropped sharply in 2020 when the economy essentially closed but have not recovered to 2019 levels. Some 11 million job openings vastly exceed the 6.9 million unemployed. Many remain on the sidelines because they fear being infected by Covid-19. Mothers remain at home for lack of child-care providers. Daycare workers declined by 108,700, or 10.4%, from February 2020 through September 2021. Many have rethought their lifestyle and thrown in the work towel after commuting time jumped by 6% between 2014 and 2019, according to the Census Bureau. The pandemic generated a surge in retirees, with 1.5 million more leaving full-time employment since 2020 than the past trend implied.