How the Data Show the Economic Recovery Is Still Young

Not much changed in the revised third-quarter gross domestic product data: Growth was a bit faster than the first estimate indicated, largely because inventory investment slowed less rapidly. But the preliminary estimates of third-quarter corporate profits, also released Tuesday, were more interesting. It’s a common historical pattern that capital incomes (profits and net interest payments, mostly) fall sharply as a share of corporate-sector income during recessions but rise rapidly in the early phase of recoveries. As recoveries mature and labor markets tighten and wages rise, the capital share of corporate-sector income then tends to fall. And the share of corporate-sector income claimed by labor compensation (wages and salaries) follows a mirror opposite pattern: rising sharply during recessions, falling in early recoveries, and then rising again in mature stages of the business cycle. The behavior of these capital and labor income shares is a pretty good way to assess whether a recovery is “young.” And Tuesday’s data highlight that the recovery from the Great Recession, despite having gone on for more than five years, is still very young. In making this “young recovery” argument, a colleague and I noted (in this paper) that the first-quarter data on corporate profits should be largely discounted, as the sharp drop in profits in those months was driven by a tax change (the end of accelerated depreciation at the beginning of the year). Goldman Sachs research notes also indicated that according to capital income share measures the recovery was still young and that it was too early to declare that this share had peaked in 2013. Tuesday’s data confirm this: The share of corporate-sector income accruing to capital-owners reached 27.3%–the highest since the recovery from the Great Recession began and the highest since 1950. Even stripping out the recent abnormally high profits earned by the Federal Reserve leaves the profit share just 0.1% below its post-Great Recession high point, and it still remains higher than any pre-Great Recession level since 1950.