The Vital Impact Of Corporate Profits On Payroll Data

This article was originally published on Moneyball Economics, home of the world's most unique economic commentary.

Back in 2009, corporate profits started to soar. Meanwhile payrolls were crashing, falling every month in 2009, an average of -471K per month.

Corporate profits stayed strong in 2010, unlike payrolls which barely grew. Payrolls remained in this ugly place because banks – which accounted for the lion’s share of corporate profits – don’t typically drive much hiring.

For this reason, when discussing corporate profits and payrolls, we must narrow our focus to domestic, non-financial profits. Tiffany’s success in China, for example, does not move the hiring dial in the US. Domestic hiring is driven mostly by domestic business activity, and financial company results are more about interest rates than anything that triggers hiring.

In 2010, Main Street corporate profits began to take off, and so did hiring. Payrolls turned from negative to positive. As domestic, non-financial profits jumped in 2012, payrolls hit a monthly average of 193K.

Then, in 2014 when Main Street corporate profits took off again and payrolls jumped to an average of 250K per month, Wall Street profits simultaneously collapsed.

When it comes to hiring and payrolls, Wall Street profits are irrelevant at best and distorting at worst. Pay attention exclusively to Main Street corporate profits (the domestic, non-financial flavor).

Steady Main Street Profits, Steady Hiring

Although we’re already seeing some payroll pullback in 2015, thanks to mostly strong corporate profits, hiring demand remains solid.

The pockets of weakness are mostly in the energy and commodities space. Prices for iron are down 30 percent in the last six months and oil is down as well. A follow-on impact is affecting the manufacturing space as oil company CAPEX gets cut. Naturally payrolls have taken a hit and have retreated from last year’s 250K monthly average to 210K this year.

There is also some blowback from the strong dollar but the impact tends to be overstated: 70 percent of the US economy is domestic and that 70 percent is enjoying the benefits of cheaper priced imports as well as some slower inflation thanks to lower oil prices. Annual CPI (consumer price inflation) is running negative for the last 12 months (-0.2 percent) thanks to cheaper oil.

For the remaining 30 percent of the economy that depends on exports, a strong dollar doesn’t necessarily mean lower sales volumes. Sure, a strong dollar reduces the value of overseas sales that are denominated in local currencies, but 1M widgets (production units) at $1B dollars versus 1M widgets at $900M will still require the same level of manpower.

Otherwise profits are steady and so is hiring.

2015 Hiring Will Remain On A Lower Trajectory

We’re already seeing some hiring pullback. Looking at the rest of 2015, expect Main Street profit growth to slow.

Companies will be wary to accelerate hiring. After all, restraining payrolls is the easiest path to a few pennies of positive EPS.