Market Records a Boon for Companies, but What About Workers?

Oct. 25, 2006 — -- In economics -- as in life -- perspective is important.

These days, as the Dow Jones industrial average sets record highs virtually every day, that maxim is fairly easy to prove.

While millions of American workers are feeling the pinch of increased personal debt, stagnant wages, and a slowing real estate market, the companies they work for are enjoying an undeniable boom time.

As the Dow average hits all-time highs, the broader market -- as measured by the S&P 500 Index -- is expected to turn in its 13th consecutive quarter of double-digit profit growth.

The latest figures from Thomson Financial show that third quarter corporate profits are up 15.9 percent, with almost half of all companies reporting.

If things turn out as expected in the coming weeks, this uptick in earnings will match the longest run of corporate profit growth in history.

How are companies doing it? Analysts say they're cashing in on big growth outside our borders.

Shrinking savings and flat wages have hindered the buying power for a large portion of the U.S. population. But U.S. companies have tapped into the wallets of millions of previously unrealized overseas consumers to help drive corporate growth and bolster U.S. market performance.

"The one economy that counts is the global economy," said Michael Thompson, director of research at Thomson Financial. "The U.S. is the big engine in the global economy, but you can't just think of how things are going here. American corporations are getting the benefit of playing a big role in a more diverse global economy."

While growth of the U.S. economy has been halved in the last six months to 2.6 percent, that slowdown has not been seen outside our borders, thanks to the amazing developments in India and China.

Those countries have seen big jumps in their economies in the last year -- 8.5 percent and 9.9 percent, respectively, according to the World Bank's figures for 2005.

Overall, world economic growth has averaged 4.9 percent over the last four years, its strongest performance since the early 1970s boom. And American companies have been cashing in via their global operations.

Boost in Productivity -- Will Workers Benefit?

Global expansion isn't the only thing helping corporate profits along.

Companies are doing more with less -- in economic parlance. They are increasing productivity, and that has set the stage for lots of black ink on the bottom line of American companies.

But that extra cash has not always trickled down to their workers.

"What has happened is that over the past couple of years wages have been suppressed, but worker productivity growth has been huge," said Robert Brusca, principal economist with FAO Economics.

"When that happens, the fruits of your labor go to your employer."

But some recent shifts in the overall economic picture might begin to shift workers' perceptions.

Unemployment rates have been below 5 percent for 10 months, and productivity growth has slowed.

To continue growing, employers have had to start raising wages as they compete for a scarce resource -- new workers -- that they need to fuel their profits.

"The economy is getting tighter, and you're getting benefits for workers," Brusca said. "Productivity growth is slowing down a little bit, and worker compensation is beginning to accelerate. That's having the dual effect of both boosting wages and putting some pressure on corporations eroding their profits."

Add to that the recent drop in energy prices, and you have an environment where people might begin to feel like they have more money in their pockets to buy the things they want.