Corporate Profit Growth Percentages Drive the Markets and Employment

Like it or not, the American economy is about business, and not about government. Business is not just about profit, but profit percentage growth over time . Business transactions are what we complete to live our private lives. Therefore, business is not bad as it has been portrayed by those that seek to control business. Also, there is no reason to take risk in business and put up your capital unless you can earn a certain percentage gain, and continue to grow. It would be irrational to operate at a loss, unless you are the government.

These are the year over year income numbers for 2007 and 2008 by Quarter:

2007 QTR I       7.43%

2007 QTR 2     1.22%

2007 QTR 3    -1.06%

2007 QTR 4      -1.32%

2008 QTR 1      -1.55%

2008 QTR 2      -2.98%

2008 QTR 3      -4.82%

Is there any wonder with the year over year performance above that companies are not adding to their headcount, and have shelved expansion plans? Are you surprised our economy is contracting? 

The American Union worker already knows to get more from them, there has to be sufficient enticement to get them to do so. It is why they earn time and a half for working overtime. If they were asked to work half-time for overtime, there would not be any incentive to work. It is the same for business. Why would any CEO add headcount and expand when profitability is declining? Why work more for less in the end? They will not grow unless they have a chance to grow the profits.

So what triggered the decline in profits? Higher energy prices, for one. Higher minimum wages also affected profitability. They will again this summer. See my column on the minimum wage here:[link edited for length]

Corporations are in business to grow. Not just grow sales, but to grow profits. My analysis shows that when year over year corporate profit growth falls below a certain percentage, then the S&P 500 will be down over the next five quarters. Right now we are at a negative 4.8% growth rate for profit over the last four quarters. So do not expect a higher S&P 500 in a year.

My analysis also shows that employment also needs a certain percentage growth in profit before it begins to climb. This is roughly the 3% mark. Most analysis we hear about uses the Unemployment numbers. But those do not reflect the true character of the employment picture. Frankly, as benefits for the unemployed are increased, there is greater incentive to claim to be unemployed while not really seeking a job. And the government uses this number to justify the need for more taxpayer funded programs.

So, based on the profitability numbers, you should also be prepared for higher unemployment rates one year from now. Do not expect any growth in employment until we see an increase in corporate profits.

So the question we need to ask is “Are President Obama's Policies going to increase or decrease Corporate Profit Growth in the future?” So far, I think that we can safely say that just about every program announced is going to increase the cost of doing business, not decrease it, and that they will harm profits, not boost them.

Higher taxes reduce profits, higher minimum wage rates reduce profits, new taxes such as carbon cap and trade will reduce future profits. More insurance mandates, more unionization are all going to decrease profits. So businesses must reduce their expenses to improve their profit picture. Right now they are trying to do this by reducing head counts, which reduced labor expense, insurance expenses, and more.

When competition reduces your profitability, everyone wins as we end up with new and innovative products, new stores and restaurants opening, and more people being hired to work at these locations.

When the government steps in to help one competitor at the expense of another, the opposite happens, because the profit margins are non-existent at one,while the other must reduce their expenses or their profit margins in order to compete. This is not healthy competition and is not true capitalism. It does not provide the just rewards for the corporations that have chosen the most profitable path to their operations. Profitable growth in the private sector, not the government sector, will be the only thing that can save this economy in the long run.

If you are worried about corporate profits rising too high, fear not. Higher corporate profits promotes new competitors,which reduce profitability in a healthy manner for the capitalist system.

There is only one thing that government should be doing today: Removing the obstacles that will keep corporations from growing their profits. More people will be hired, more income tax will be collected, and fewer people will be unemployed. It really is that simple.

We are not in business to support government. Yet that is where we are headed under the Obama Administration, and the direction the Bush Administration was leading us as well. Corporate profits paint an accurate picture of where we are headed. And they accurately predict what will occur in the future.

The government has gone after business profit, because that is where the money is to fund their programs. Yet they are killing the income stream that drives our nation. There is only one place to go after that-your personal assets.

It has been said at this website that Money is the blood of the economy. I am saying that profit growth is the heartbeat of the U.S. Economy. The weaker it is, the weaker the economy will become, and the transfusions(printing and injecting of money into the system) will do nothing if the heart stops beating.

With negative profit growth in our future, the pulse is weak, and fading. If we keep ignoring this simple truth, we will not survive.


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