November Jobs Data - “Good” Cheer For All Except Equity Investors

There are a number of reasons why the November employment data should bring “good” cheer to many; everyone except equity investors, that is. Here’s why.

In November, wage growth of 3.7% for the past 12 month was just 0.1% below the revised (upward) gain of 3.8% recorded in October. Adding wage growth to employment growth (1.5% in the last year) results in Q4 nominal wage and salary income growth of approximately 5.25%.

That is clearly “good” news for workers, as it represents the fastest employee compensation of the current cycle. Yet, faster growth in employee income does not automatically translate into faster growth in company’s income (profits).

To be sure, Q4 nominal wage and salary income growth is running at least 100 basis points above nominal GDP growth. In other words, operating profit margins are being squeezed as they have been for the past several years.

No one is trying to “rain” on the equity parade, but just pointing out a simple rule of thumb and an identity in the GDP accounts. That is, nominal personal income (which includes wage and salary income from employment and hourly earnings data) and corporate profits are the income equivalent of nominal GDP. So during periods when nominal wage and salary income rises faster than nominal GDP operating profits and margins (see chart above) are rising less fast or declining.

Based on the GDP data, operating profits and margins for US companies peaked in 2014 and have been sliding ever since---and the new labor market data indicates margins and profits will fall again in Q4. As a result, the cheer from equity investors over the November employment data is at odds over what the jobs and earnings data implies for current quarter profits. Also, the profit outlook for 2020 is clouded by the fact that operating margins are highly cyclical and its hard to envision an improvement in margins with labor costs rising faster than overall revenue,