Bad Report on the Economy Could Be Good News For Republicans
While the latter is an exaggeration, it is certainly true that until recently corporate profits and CEO pay increased a lot faster than national income and that thus real income for most Americans have increased a lot slower than per capita income. This is indeed probably part of the story why Bush got low ratings on the economy even though the economy was booming.
But now it seems that corporate profits are falling again whereas real wages for workers are rising. The latest productivity and unit labor cost report from the Bureau of Labor Statistics was pretty bad news for the U.S. economy. Productivity growth on the previous quarter fell to zero, and year over year productivity growth fell to 1.3%-the lowest since 1997.
But even as productivity growth have dramatically accelerated, compensation fo labor have in fact accelerated. Real compensation is now up 3.2% over the previous year and unit labor costs is up 5.3%.
While we will have to wait until the next GDP report for the first statistics on third quarter corporate profits, it seems likely that corporate profits fell. With
unit labor costs rising a lot faster than price inflation, this can only mean that profits fell. This may surprise some as earnings reports from Wall Street were fairly strong, but Wall Street companies include only big multi-national corporations. As corporate profits in the national accounts includes all companies, including all small and medium sized, this apparent discrepancy is probably the result of falling profits for small- and medium sized companies and/or rising profits for the non-American branches of big business.
This shift of national income from capital to labor could be bad for the economy as the strong corporate profits have been driving increased business investment, which in turn have helped counteract some of the effects from the bursted housing bubble. But as the increased real wages should improve perceptions of the economy among ordinary Americans, this might help the Republicans in newt week's congressional election. Confirming this view is the fact that even as the economy is weakening, the President's rating on the economy is suddenly rising.
I still believe the Republicans will suffer net losses in Congressional seats, but the improved ratings on the economy together with John Kerry's "botched joke" will limit these losses and possibly help them stay in control in the House and/or the Senate.