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Profits and the Consumer


Maybe consumers will be able to extract extra wages from corporate America?

Editor's Note: The following is an exchange between Professor Vitaliy Katsenelson and Minyans in the Mountains speaker Stephanie Pomboy of

Vitaliy: Hi Stephanie, I enjoyed meeting at MIM3. We talked about China. Here is the article I wrote on that topic.

Also, here is one of my better (or not) economic articles with a nice chart.

Stephanie: Great stuff, Vitaliy! I really enjoyed the profits write-up. My 'take' on profits has been that the surprisingly large profit growth recently has owed a large debt to the housing bubble. Obviously, by boosting consumption (and the economy in general) it allowed top-line growth to be strong. But it also (I believe) allowed companies to hold wage gains below the rate of inflation. With many workers cashing-out more equity from their homes than they make in a year ($40k-50k at a clip), the urgency to get that extra 50 cents an hour wasn't nearly so high. No one looks forward to asking for a's an awkward conversation after all. So if you can raise the money elsewhere, why bother? Obviously, that's all about to change. The question in my mind is whether the belated demands for wage increases meet with any success. Seems doubtful, what with top line growth slowing. But we shall see!

Vitaliy: I agree. I was teaching a class last Thursday and was discussing this with my students. Maybe consumers will be able to extract extra wages from corporate America? If they do it may soften the impact of the housing market, BUT it will impact corporate profits. It just hit me recently that most don't understand the concept of mean reversion. People think when things revert to the mean they go down to the "average." They may, but what usually happens is that they go down to below average. So margins are likely to go down to below average levels.

Stephanie: Vitaliy, say 'amen,'

Mean reversion is one of those phrases people throw around without fully appreciating how it works. Wouldn't life be great if everything neatly 'reverted to the mean?!' Anyway, I always am guilty of oversimplifying, but it strikes me that businesses that can outsource labor will respond to US worker demand for higher wages by giving them the proverbial finger. Meanwhile, those businesses (like retail) that cannot be as flippant will see their margins get completely hammered...squeezed in the vise of higher labor costs and slowing top line revenues. It shall be interesting!!

Vitaliy: I am thinking this mean reversion misunderstanding is so important that I need to put it in my book. You are making excellent points on retail, though arguably they have a large supply of labor to play around with. But outsourcing may actually keep pressure on skilled labor – great point. I guess the flattening of the world is pushing global wage equalization. Our $20 per hour wage is getting equalized with $0.50 in China – a bit scary.
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