Can Profits Continue to Outpace Labor Costs?

by: SA Eli Hoffmann

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

AHEAD OF THE TAPE: Labor Cost Conundrum

  • Summary: Analysts are trying to understand why corporate profits and labor costs, which usually move in opposite directions, are presently travelling in tandem. Pretax corporate profits are up 20.5% from Q2 2005, while labor costs are up 4.9% over the same period. The Fed keeps a close eye on rising labor costs, because companies are likely to pass these costs on to customers, leading to inflation. The current strength in corporate profits suggests perhaps other measures must be used to measure labor costs; one such measure, which factors profits into the equation, suggest labor costs may be up as little as 0.2%. WSJ's one-line conclusion: "If you still believe in Goldilocks, it might make sense to trust the more benign measures; otherwise, it might be time to worry that labor costs are rising and the profit boom has lost steam."
  • Comment on related stocks/ETFs: Perhaps what the latter labor cost figure, which takes soaring profits into account, suggests is that companies are sharing some of their increased profits with their employees. Inflated labor compensation is seen as one of the main reasons GM and Ford are having such a hard time keeping up with their overseas competitors.