Corporate profits surge to 40-year high - MarketWatch

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Profits surge to 40-year high

When will corporations spend some of their hoard?

 

 

By Rex Nutting

 

MarketWatch

Last Update: 5:36 PM ET Mar 30, 2006

 

*WASHINGTON (MarketWatch) -- U.S. corporate profits have increased

21.3% in the past year and now account for the largest share of

national income in 40 years, the Commerce Department said Thursday.*

Strong productivity gains and subdued wage growth boosted before-tax

profits to 11.6% of national income in the fourth quarter of 2005, the

biggest share since the summer of 1966.

 

See full story.

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For all of 2005, before-tax profits totaled $1.35 trillion, up from

$1.16 trillion in 2004 and just $767 billion in 2001.

 

Meanwhile, the share of national income going to wage and salary

workers has fallen to 56.9%. Except for a brief period in 1997, that's

the lowest share for labor income since 1966.

 

" It's a big puzzle, " said Josh Bivens, an economist for the Economic

Policy Institute. " If this is a knowledge economy, how come the brains

aren't being compensated? Instead, the owners of physical capital are

getting the rewards. "

 

Despite the flood of cash coming in the door, corporations are

investing comparatively little in expanding their operations. Capital

spending has been below average, especially considering the strength

of the economy, the level of profits and the special tax breaks given

to boost investment.

 

In the fourth quarter, business fixed investment increased just 4.5%.

 

In the past year, investment has risen 6.8%. The growth rate has been

falling for the past four quarters.

 

Some economists are counting on the corporate sector to pick up their

investments in the coming year, to replace the economic stimulus that

will be lost as the housing market cools.

 

Profits have been so high because almost all of the benefits from

productivity improvements are flowing to the owners of capital rather

than to the workers.

 

While profits are up 21.3% in the past year, labor compensation is up

just 5.5%. After adjusting for inflation, population growth and taxes,

real disposable per capita incomes are up just 0.5% in the past year.

 

Competition, tight labor market may force rise in labor income

But as the labor market tightens, labor's share of income will likely

rise, economists say.

 

" Capital spending will stay strong, " said Gus Faucher, director of

macroeconomic research at Moody's Economy.com. He theorizes that, to

maintain productivity growth in a hypercompetitive world, companies

will be forced to invest in capital as labor becomes relatively more

expensive.

 

Corporations certainly have the means to invest, but they've been

cautious, said Ken Goldstein, an economist for the Conference Board.

 

In 2005, corporations retained $460 billion of their profits, while

handing back $514 billion in dividends.

 

Consumers, as always, hold the key. If labor income rises enough,

consumers could keep up a healthy pace of spending even if they lose

ready access to their home equity as a source of purchasing power,

Goldstein said.

 

But consumers are very wary of rising prices. So far, their incomes

have not kept pace with inflation. Goldstein expects consumer spending

to slow this year.

 

And if consumer spending slows, corporations will become more hesitant

about expanding their productive capacity. Unless there's stronger

demand from overseas markets.

 

Goldstein figures there's less than a 50-50 chance that business

investment will rise significantly in the coming year. The Conference

Board expects the U.S. economy to grow 2.5% in the next four quarters,

after growing 3.5% in the past four quarters.

 

That's not horrible, but it's not a boom either

The happy scenario could still play out. But " there are a lot of

'ifs', " Bivens said.

 

 

 

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