Beat the Press

Dean Baker's commentary on economic reporting


Can You Say "Lower Profit Margins?"

Apparently the reporters at MarketWatch can’t. An article noting the uptick in labor compensation reported in the second quarter Employment Cost Index reported that Fed Chairman Ben Bernanke said that higher labor costs need not lead to inflation, if they are offset by rising productivity. Well, in the very next sentence Mr. Bernanke also said that higher labor costs could be offset by lower profit margins:

"Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs."

But that part didn’t make it into MarketWatch. Thanks go to my friend Jared Bernstein for this tip.


  • At 3:00 PM, Anonymous ndk said…

    Allow me to take the opportunity, at the mention of profit margins, to point out a ghost from early '01:

    "The Congressional Budget Office, which makes all the projections used for the tax and budget debates, projects that real (inflation adjusted) profit growth will average 1.0 percent annually over the next decade."

    and the similarly prescient:

    "Either they have to tell me they believe the economy will grow far faster than anyone is generally willing to claim (and then we can pursue the implications of this assertion), or they have tell me that the rise in the stock market represents redistribution from wage earners to shareholders, or a bubble, with its own implied redistribution."

    The amount of GDP growth that has occurred in consumption and the attendant increase in corporate profits in recent years has been stunning. I don't think anyone could have seen this coming.

    The pressures that have stunted wage growth, such as the Internet and its attendant globalization and productivity growth -- firms being able to meet growth targets without hiring additional workers, thus dampening labor competition -- seem pretty permanent.

    Aggregate demand is going to be a much bigger issue soon than it has been for the past fifteen years. I'm convinced that deflation never really disappeared, but was instead shrouded behind a wall of homes.

    I've got great respect for Bernanke, and I think he's trying to do the right thing, but I'm not sure it's possible at this point. These are structural pressures.

  • At 4:20 PM, Blogger Dean Baker said…


    You seem to have a gripe with the Congressional Budget Office, not me. I was insisting that we use consistent projections -- we were not. (Specifically, the projections for stock returns and capital gains were inconsistent with the projections for profit growth.) I was not making my own projections.

  • At 5:20 PM, Anonymous ndk said…

    Sorry if that came off as though I were quoting you; I included the CBO reference deliberately. I just meant to point out how remarkable corporate profits really have been, and how hard it was to foresee that.

    If corporate profits as a percentage of GDP make a handoff to wages via lower profit margins, isn't that a great path to normalizing some of these imbalances?

  • At 7:24 PM, Anonymous Anonymous said…

    ndk quoted Dean Baker thusly: "The Congressional Budget Office, which makes all the projections used for the tax and budget debates, projects that real (inflation adjusted) profit growth will average 1.0 percent annually over the next decade."

    But Dean, shouldn't real profits rise with real GDP, assuming profits are a constant fraction of GDP? (Generally do agree with your claims on the mathematical inconsistency of privatizers' views on the "solvency" of SS versus future returns in the stock market.) What's the connection between this projection of profit growth and whatever underlying projection of GDP was used?

  • At 11:08 PM, Blogger Dean Baker said…


    the CBO view was that profits were at a cyclical peak and therefore would fall as a share of GDP. In fact, they did in the 2001 recession, but they bounced back to an even higher hsare in the last few years.

  • At 11:45 AM, Anonymous Rex Nutting said…

    Fair enough criticism, Dean. But it's not like we at MarketWatch are unaware of the link between wages, productivity and profits. We've written about it frequently.
    This was in another MarketWatch story on the same day:
    "For monetary policy, policymakers at the Federal Reserve are watching for signs that employee compensation could be accelerating faster than productivity. Persistent inflation is nearly impossible without a feedback effect through higher wages, economic theorists say.
    "High productivity and small wage gains have allowed firms to reap record profits, even as their input costs rise. Intense competition has, so far, reduced the ability of companies to pass along their higher costs to their customers."

  • At 5:52 PM, Blogger Dean Baker said…

    Okay Rex,

    I guess one out of two isn't bad.

  • At 7:21 PM, Blogger Jim Hannley, RIA said…

    I submit that the LACK of competition has been the factor in soaring profits. Due to the monopolization of so many industries, corportations can keep their prices high and wages low because they do not have to worry about bringing their products to market at competitive prices. As for productivity meeting wage advances, the soaring productivity we have seen in the last 25 years has hardly been matched by increases in real wages. Workers have a lot of wage raises due them just to catch up to their incredible productivity advances.

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