The Economics of the Employment Recovery and Quantitative Easing

Dec. 4, 2013
With a profitable corporations slow to hire, further Federal Reserve quantitative easing could create more potential for inflationary pressures and problems in the future.

“The weakest employment recovery in seven decades is proving a boon to equity markets.”

That is the lead-in to a news article today. The premise is that weak job growth means that corporations such as Disney, ConocoPhillips, and Northrup Grumman are more profitable because they are doing more with less people.

It also means that the FRB is going to keep interest rates low and Quantitative Easing in place; that means low borrowing costs for corporations. Low interest rates help the bottom line.  Corporate profits are doing well and the stock market is responding accordingly with steadily higher prices.

In essence, a weak job market, which is bad for people, is good for investors (who are also, at the end of the day, people). On the surface it might appear to be a wash with some winners and some losers. However, there is another factor to consider.

Employees are making less than was historically the case relative to corporate profits. Data from the Bureau of Economic Analysis (BEA) shows that the ratio of wages to profits (or personal earnings to corporate earnings) decline to 3.2% in the second quarter of 2013.  This is the lowest level since 1966 and well below the longer-term average of 4.5%. The highest ratio occurred just prior to the onset of recession in 2008. 

Employers are not distributing the wealth to the same extent that they used to. This can become a real problem as a lack of wage increase could quickly result in a slowdown in consumer spending. Black Friday’s year-over-year decline may have been an early indication of exactly that. 

We believe slower consumer spending will lead to softness in the US economy in the second half of 2014. That in turn is likely to hurt profits for 2014 and further dampen employment growth. This scenario provides no room for the FRB to begin a reduction of Quantitative Easing anytime soon. 

The bottom line is that corporations are profitable, the stock market is doing very well, the FRB is pushing on a string to create job growth, and corporations have no incentive to do a lot of hiring. This leaves us with a Fed that will keep Quantitative Easing in place and thus create more potential for inflationary pressures and problems in the future.

Popular Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!