Like desert vagabonds seeking water, economics commentators are burning for some positive news this hot summer. They could be forgiven for finding optimism in corporate profits. The S&P 500 is projected to post a whopping 9 percent year over year growth in earnings. That's as good as the 2000s boom and better than any time in the 1990s. An oasis, yes?
It sure looks that way. But the closer you get to the ledgers, you better you see that while the profits are real, the idea that they are good news is murky at best.
See, sales are up, but their gain isn't nearly enough to justify the earnings leap. So what's driving the profits? "The same thing that caused the profit gains is squeezing
now," Howard Silverblatt, senior index analyst at S.& P., told the NYT's Floyd Norris. "It
is the lack of jobs." Yes, high unemployment is, strangely, both dampening revenue and enhancing profits.
This recovery is beginning to look like the last two jobless recoveries, but on steroids. Why aren't companies hiring? You can point to uncertainties about demand and the global recovery (or taxes and regulation, I suppose).
Also, look at the C-suite. As Robert J. Gordon, a Northwestern economist, wrote in a new paper, the share of executive compensation taking the form of stock options increased by 55% in the 1990s. It's ruthless rationality. Executive pay depends on high stock prices, which depend on high quarterly profits, which depend on lower costs, which are achieved by running lean through the downturn and the upswing.