Monday, December 3, 2012

Corporations can't horde all of the cash forever

CNN is reporting that corporate earnings are at the highest share of GDP ever. Conversely, wages for workers are at the lowest share of GDP ever.

None of this is a surprise. Companies have been hoarding cash, slashing their workforce and being stingy with pay raises (maybe a few percent per year, instituting no pay raises or even cutting salaries) for years, frequently using the 'down economy' as an excuse.

Combine that with companies spending millions on lobbying to get billions in tax breaks and it's easy to see how they have ended up with so much positive profits on their balance sheets.

But I suspect that will be changing in the future. First, it's just not at an equilibrium. Shareholders will demand something to be done with all of that cash and profits. Return it to the shareholders in the form of dividends or increase investments.

Secondly, the federal government is in need of revenue. They will raise the corporate tax rates, cut loopholes or some combination of the two.

Plus, as the economy continues to improve, companies will have to increase their hiring as demand for their services or products increase. With an increased demand for employees, wages will rise.

So both of these situations will change. Earnings in relation to GDP will fall while wages will rise. Will it start in 2013? Most likely, but we most likely won't see a dramatic shift until there is a sustained hiring boom.

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