Earlier this week I discussed the expectations for an increase in reported earnings of 50% over the next two years:
“Currently, according to the S&P website, reported corporate earnings are expected to grow by 20.26% in 2014, and by an additional 20.28% in 2015. In total, reported earnings are expected to grow by almost 50% ($100.28/share as of 2013 to $147.50/share in 2015) over the next two years.“
However, as I also noted, the rise in corporate profitability has come from accounting magic and cost cutting along with a healthy dose of share buybacks. Since there is “no free lunch,”the drive for greater corporate profitability has come at an economic expense. Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the “Great Depression.”  I have broken down economic growth into major cycles for clarity.
As I discussed previously:
“Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression. The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth. This has been achieved by increases in productivity, technology and offshoring of labor.  However, it is important to note that benefits from such actions are finite.”
The latest report on unit labor costs and productivity produced the following two charts which underscore this point and suggests that the current rate of economic growth is unlikely to change anytime soon.
I  increase in reported earnings of 50%, that in in 2013 reported earnings per share for the S&P 500 rose by 15.9% to a record of $100.28 per share. Importantly, roughly 40% of that increase occurring in the 4th quarter alone. The chart of real, inflation adjusted, compensation per hour as compared to output per hour shows a likely reason why this occurred. The sharp increase in output per hour combined with the sharp decline in compensation costs is a direct push to bottom line profitability.
