The Eight Forces That Are Pressuring Profits
These eight forces are structural, and cannot be erased by tax cuts or policy tweaks.
If there is any economic assumption that goes unquestioned, it’s the notion that profits will remain robust for the foreseeable future. This assumption ignores the tidal forces that are now flowing against profits.
Any discussion of corporate profits must start by noting the astonishing rise in U.S. corporate profits since the heyday of the late 1990s dot-com boom. From $800 billion to $2.4 trillion in a few years is not just extraordinary–it’s unprecedented.
Yet rather than wonder if this incredible spike higher is temporary, the financial media assumes nosebleed-lebvel profits are a new and wonderful plateau that can only move higher in the future.
This confidence ignores the systemic tidal forces working against profits.
1. Higher costs of capital. Another blithe assumption is that capital will cost almost nothing to borrow, as far as the eye can see, and that the demand for low-yield corporate debt will remain insatiable.
The yield on bonds is rising in important markets, and while many observers reckon rates will soon return to zero (or less than zero), others see the potential for a trend change from declining rates (a 45 year trend) to rising rates.
Rising borrowing costs pressure profits.
2. Rising wages and labor overhead. Even if wages remain stagnant, the overhead costs of labor–healthcare, workers compensation, pensions, etc.–are increasing for structural reasons. Factor in global pressure to raise minimum wages and competition for the most productive labor/skillsets, and the cost of labor is rising on multiple fronts. Rising labor costs pressure profits.
3. Urbanization. An unprecedented number of working-age people have migrated from largely self-sufficient rural economies to high-cost urban economies that require much more cash income. As Immanuel Wallerstein has observed, urbanization pushes wages higher, regardless of the era or the nation experiencing the urbanization.
While cheerleaders focus on the higher income of these tens of millions of new urban dwellers, and on the potential for corporations to sell them more products and banks to lend them money, low-wage workers spend the vast majority of their income on rent, food and transport. Beyond these essentials, opportunities to earn fat margins selling to the urban poor are scarce.