First Look at Q4 Domestic Income Shows Labor Share at Record Low, Corporate Profits at Record High
New data released today by the Bureau of Economic Analysis showed that GDP grew slightly faster than previously estimated in the fourth quarter of 2013, an annual rate of 2.6 percent rather than the previously reported 2.4 percent. Consumption grew more strongly than previously estimated and investment slightly less strongly. Other components were little changed.
Today’s report also includes the first look at the composition of Gross Domestic Income for Q4 2013. The data show a continuation of recent shifts in income shares. As the following chart shows, the share of corporate profits in GDI rose to 12.65 percent, and the share of employee compensation, including wages, salaries, bonuses, and benefits, fell to 52.2 percent. These figures mark record highs and lows for these GDI components since 1947, the earliest year for which data are reported.
The following chart shows trends in the shares of major GDI components over the course of the Great Recession. In addition to compensation of employees and corporate profits, the chart shows the share of proprietors’ income, which includes the net income of proprietorships, partnerships, cooperatives, and other noncorporate enterprises. Proprietors’ income now accounts for 7.9 percent of GDI, up from its low for the recession, but it remains well below the levels of 10 to 15 percent that it reached in the 1950s. Several other small items make up the remainder of gross domestic income, including rental income of persons, net interest, and the net income of government enterprises, which is typically negative.
We can redraw the data in the previous chart to bring out the relative movements in the shares of GDI components more sharply. The next chart assigns a value of 100 to each component’s share in 2007, the year before the recession began. This chart shows that corporate profits were hit hard in the first months of the recession, but began to recover already by the end of 2008, when GDP was still falling. By the time the economy had officially entered the recovery phase in mid-2009, corporate profits were surging to new highs.
Compensation of employees and proprietors’ income behaved differently. During the downslope of the recession, the shares of those two components held fairly steady, that is, they decreased but only at about the same rate as GDI as a whole. After mid-2009, when the economy began to recover, the two diverged. Proprietors’ income grew faster than GDI as a whole, so that its share increased. Compensation of employees grew less rapidly than GDI, so its share began to fall, and is still falling.
These trends in the shares of GDI components provide another view of the substantial changes in the distribution of income and wealth that are underway in the twenty-first century United States. The data shown in our charts are only indirectly related to the more widely publicized increase in the share of total income accruing to top earners, but they explain part of what is going on. It is true that some high earners receive the major part of their income in the form of salaries and bonuses, and that many middle-class families receive some corporate profit income through mutual funds and retirement savings accounts. Still, corporate profits are more unequally distributed and compensation of employees less unequally distributed than income as a whole. That means the rising share in GDI of the former and the falling share of the latter are two of the factors behind the rising fortunes of the super-rich and the relative economic stagnation of the middle class.
The final estimate of US GDP in the fourth quarter of 2013 was released last week. It came in with a 2.6% annualised growth rate, slightly higher than previously estimated. That means in 2013, the US economy grew in real terms by 1.9% and in Q4 it was up 2.6% over Q4 2012. The US is still growing at below the average rate of GDP growth over the last 30 years of 3.3% a year.
(see my post, https://thenextrecession.wordpress.com/2014/01/13/americas-lost-generation-and-pikettys-rise-in-capitals-share/).
Net business investment – that’s after deducting the depreciation of existing stock – is still nearly one-third below the pre-crisis peak. And net investment in structures is more than half below the previous peak, and down nearly 20% in equipment. Even net software investment is still 12% down.
This may well be more wishful thinking, however. Net business investment has peaked lower (as a share of GDP) in each successive recovery since the 1980s.
And while profit margins may be up as firms squeeze labour’s share, sales revenues are growing only slowly, increasing the risk that any new capital spending may reduce profitability, not raise it. What is clear is that the US economy will be stuck in its current low-growth trajectory, at best, unless businesses end their ‘strike’ and start to invest in new equipment, plant and technology.