US 4Q: Profits Fall as Wages and Dividends Rise

The third revision of US 4Q GDP growth arrives garnished with details of how national income was shared between workers, companies and shareholders. The message emerging is that even though growth is slowing, the tightening labour market means employees are managing to secure a slightly greater proportion of the marginal growth.  But in addition, as the overall profits picture also deteriorates, so companies are prepared to pay out a higher proportion of their profits in order to keep their shareholders happy.  This combination is hardly sustainable, and adds more detail to the internal dynamics of the US's profits recession.

US 4Q GDP grew by an annualized 1.4%, according to the third (and final) estimate, double the rate initially estimated, and better than consensus expected.  Growth of private consumption was upgraded to 2.4% from an initial 2.2%, thanks to a 2.8% jump in services. Residential investment also grew by an annualized 10.1% (rather than the 8.1% initial thought), and net exports stripped only 0.14pps from GDP growth, rather than the 0.47pps initially estimated.

But not everything was upgraded: private non-residential investment spending fell an annualized 2.1%, worse than the 1.8% fall initially estimated.

The 1.4% annualized GDP growth just about keeps the economy in touch with its 2009-2015 trend growth rate of 2.1%, but there’s no hint that the economy is moving back towards its 1990-2007 trend growth rate of 3.2%.

More worryingly, despite the upgrade, this GDP expansion is not enough to sustain profits growth. In fact, corporate profits, including depreciation and inventory adjustments, fell 9.2% qoq, and generated the steepest yoy fall since the recession of 2008. Proprietor’s income fared slightly better, rising 0.5% qoq, which suggests a higher proportion of profits are being paid out in dividends. Rental income, meanwhile, rose 1.2% qoq.  These three sources of income from profits together fell 3.7% qoq and fell 3.4% yoy, which, once again, was the bleakest result since 2008.

By contrast, the wages bill rose 1% qoq and 4.1% yoy.  The result is that the wage bill is now rising faster than GDP  in nominal terms, and wages as a proportion of GDP rose 40bps yoy to 54%, which was the highest proportion since 2009, and almost exactly in line with the 10yr average. Meanwhile, corporate profits as as percentage of GDP fell 1.4pps yoy to 8.3% in 4Q, which was 0.4 standard deviations below the 10yr average of 8.8%. If one includes proprietors’ income and rental receipts, the proportion rises to 19.8% of GDP,  also down 1.4pps yoy, but still above the 18.7% average of the last 10 years.