America’s CEOs have been rewarded for performance that has driven corporate profits to record levels.
“The typical pay package for the head of a company in the Standard & Poor’s 500 was $9 million in 2010, according to an analysis by The Associated Press using data provided by Equilar, an executive compensation research firm. That was 24 percent higher than a year earlier, reversing two years of declines.”
“Executives were showered with more pay of all types — salaries, bonuses, stock, options and perks. The biggest gains came in cash bonuses: Two-thirds of executives got a bigger one than they had in 2009, some more than three times as big.”
This situation presents an odd dichotomy. The housing market remains moribund and likely double-dipped, the unemployment rate and jobless situation has shown little improvement in many, many months. Yet, corporate profits and CEO pay could not be better. Even as the Federal Reserve seeks to keep monetary policy loose and accomodative, I suspect the current momentum will continue as companies continue to make hay with what they’ve got: more jobless profits…
As is said when the Fed prints money, it has to go somewhere. We have found one more resting spot for that fresh cash!
In “Australia Boom Pays Men Without Degree More Than Bernanke“, Bloomberg uses a gimmicky title to call attention to the tremendous gains in Australian wages during the current boom in commodities:
“Wages grew 3.9 percent in the three months through December from a year earlier, the fastest pace since the first quarter of 2009, according to government figures. When the central bank decided March 1 to keep its official cash rate at 4.75 percent, it said wage growth had returned to levels reached before a 2009 decline.”
Bloomberg also reports that Australian unions are seizing this opportunity to press for higher wages:
“The Construction, Forestry, Mining and Energy Union, Australia’s biggest in the building industry, sought pay increases in February of as much as 24 percent over four years. The Communications, Electrical and Plumbers Union is seeking annual pay rises of 5 percent over the next three years, almost double the inflation rate.”
The article speculates that tight labor conditions and rising wages could place additional pressure on the Reserve Bank of Australia to restart its rate-hiking campaign. Such speculation could explain the Australian dollar’s rapid rise to new all-time highs against the U.S. dollar.
Source: dailyfx.com charts
Disclosure: author is long FXA (Rydex Currency Shares Australian Dollar Trust ETF)
Charles Evans, President of the Chicago Federal Reserve, recently spoke at The Darla Moore School of Business giving “A Perspective on the Current Economy.” The press summarized the lecture by indicating Evans remains a “dove” on inflation:
“The Fed is more sanguine about inflation than some because an outbreak of higher prices is missing a key ingredient – higher wages, Evans said…A weak labor market will continue to exert important downward influences on inflationary pressures, he said.” (from Marketwatch)
A cynical person could say that Evans does not fear inflation because QE2 has failed to provide the one single thing that Americans care most about in the economy right now: jobs. Instead, I will note that this commentary comes immediately on the heels of an op-ed piece from Laurence H. Meyer, a former governor of the Federal Reserve, who opined that inflation is not a problem…and even if it became one, the Fed would quickly get it back under control. Since the Federal Reserve cares more about inflation expectations than current levels of inflation, it makes a lot of sense that a good amount of energy is spent trying to convince people that no matter what the data say or the anecdotal evidence (or Inflation Watch postings for that matter!), the future is fine.
However, the Wall Street Journal noted that the commentary from Evans runs directly counter to the warnings of coming inflationary pressures from FOMC voting member Charles Plosser, president of the Philadelphia Federal Reserve Bank (see here). Apparently, the gameplan and script are not receiving the same reading on the team!
Corporate profit margins have hit record levels, but it seems inflationary pressures are waiting in the wings to send those margins back toward the mean. Zero Hedge summarizes the latest Philly Fed report, pointing out that prices paid less prices received has not been higher since 1979.
- businesses try to increase prices, can’t, and see their margins cut;
- businesses do raise prices, people buy less, and revenue gets hit.
The stubbornly high unemployment rate has convinced many that resistance to price increases is a foregone conclusion. However, I would like to layer on a more nuanced scenario here. Given that increasing employment is the Federal Reserve’s stated goal of its latest quantitative easing program, we should assume that the Fed’s response to either of the above scenarios will be more quantitative easing. If profits or revenues fall, companies will not hire more workers in response. If anything, companies will fire more workers. In other words, even with inflationary pressures building in the economy, especially in scenario #2, the Federal Reserve could actually find more reason to continue adding to those pressures. We may not get a self-reinforcing negative feedback loop, but it will feel close!
The Bank of England already faces this conundrum of accomodative monetary policies even in the face of stubbornly high inflation – but governor Mervyn King has found a lot of comfort in the United Kingdom’s current output gap and a conveniently tame outlook for inflation.
So, what if quantitative easing actually works and increases employment? Well, there should be a lot of increased prices waiting to eat into those newly minted paychecks.
It seems everywhere we look, inflationary pressures are inescapable. Corporate margins may be the last canary in the coal mine…
Employing workers will get even more expensive in 2010. The National Association of State Workforce Agencies (NASWA) reports that at least 33 states will raise payroll taxes next year to shore up depleted unemployment insurance funds. Click here for complete story….