From Andy Lees this morning:
Economists at the Northeastern University in Boston recently found that corporate profits captured 88% of the entire US economy’s income growth between the second quarter of 2009 and the fourth quarter of 2010, with workers taking just 1% of the increase. Recent Department of Labour data showed unit labour costs edged up 0.7% in the year to March though not enough to make up for a 2.9% fall in the previous 12 months. Northeastern economics professor Andrew Sum says the mismatch is “historically unprecedented” and bodes ill for future growth, especially given many companies are sitting on their cash rather than investing it. “Workers have no money, no purchasing power, so that’s why consumption is not moving”. By sitting on their profits firms are acting like earners “who take their money and stuff it in the mattress. That’s happening across the economy”. This means that US growth is either financed by debt (mainly Federal debt) as household income is not keeping pace with GDP growth, or secondly by exports which makes H2 potentially vulnerable to a slowdown as the international markets start to slow.
Andy notes the earnings miss by Caterpillar and slow US revenue growth at GE and Ingersoll Rand as data points showing softer earnings growth from US domestic sources. The debt ceiling debate has stalled and the possibility of default is no longer an outlier. Even so, budget cuts from a deficit deal would weaken consumer demand in the US, already slowed by unemployment. My expectation is that by next month the first spate of earnings warnings will trickle in and S&P earnings growth for the rest of the year will start to be cut.