Workers earning less, corporate profits going up

Income gains in the U.S. are slowing and workers’ slice of the earnings pie is shrinking, raising the risk that consumer spending slackens next year.

Gross domestic income, or the money earned by the people, businesses and government agencies whose purchases go into calculating growth, rose at an average 2.8 percent annual rate from April through September after climbing 4.3 percent in the previous six months, Commerce Department data on Nov. 22 showed. Employee compensation last quarter accounted for its smallest share since 1955.

In contrast, the portion accruing to corporate profits was the biggest since 1950, showing companies are hoarding cash as concern grows that a European country will default on its debt and that deficit-reduction gridlock in Washington will continue. Without more pay and a pickup in hiring, households may ring in 2012 by making their own budget cuts.

“Businesses are very cautious so they’re not hiring and they’re not distributing their profits to consumers as they had in past expansions,” said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. “With slow wage and salary growth, consumer spending will be on a sluggish trajectory.”

The slowdown in U.S. consumer spending may already be on train after another Commerce Department report showed consumer spending, which accounts for about 70 percent of the world’s largest economy, rose 0.1 percent in October following a 0.7 percent increase in the previous month.

A pickup in spending in the third quarter, a 2.3 percent gain at an annual rate after a 0.7 increase in the previous three months, was the “the worst possible outcome,” Tom Porcelli, chief U.S. economist at RBC Capital Markets Corp. in New York, said in a Nov. 22 interview on Bloomberg Television, since it was “entirely because of a draw down in savings.”

The savings rate dropped to 3.8 percent in the third quarter, the lowest level since the last three months of 2007, which marked the end of the previous economic expansion.

The plunge in savings came after consumers experienced two consecutive quarterly declines in after-tax income adjusted for inflation, the first back-to-back drops since the second half of 2009. Households may need to rebuild those nest eggs before the feel comfortable buying more than just basic necessities.

A drive to preserve profits may be one reason behind the decrease in pay. Earnings climbed 2.1 percent last quarter to $1.98 trillion at an annual rate, making up 13 percent of the $15.1 trillion in gross domestic income, the most since 1950. At $8.25 trillion, employee compensation, including wages and supplements, accounted for a 56-year low 55 percent.

Companies making up the Standard & Poor’s 500 Index did even better than the rest in the third quarter. Earnings climbed 15 percent from July through September, according to results from the 464 companies in 500 Index that have reported since Oct. 11. Of those, 73 percent posted better-than-estimated earnings, data compiled by Bloomberg show.

Profits at businesses in the S&P 500 in 2011 will rise 17 percent once the fourth quarter is reported, according to estimates from more than 10,000 analysts compiled by Bloomberg. That would give the benchmark gauge for U.S. equities the biggest two-year profit growth since 1995, the data show.