Buybacks: A Turn toward Prudence, for Now

According to preliminary numbers from Standard & Poor’s, buybacks among S&P 500 components rose rose 15% in the third quarter, after a 55% decline in the second, leaving them 42% below a year earlier. Measured as a percent of GDP, buybacks are now in the same neighborhood they were last seen in in 2010—though that’s still well above where they were any time between 1998 and 2004.

Measured as a percentage of operating earnings, as in the second graph, buybacks fell to their lowest levels since 2010, 32%. Despite the increase in dollar volume, buybacks declined as a percentage of earnings because earnings were up 42% in the quarter. In the 40 quarters between 2010 and 2019, buybacks fell below 40% of earnings in just two of them; the average over that period was 53%.

And our third measure, buybacks relative to dividends, saw an uptick in the quarter, but remain at their lowest level since 2009, 88%. The second and third quarters were the only two since 2010 where traditional dividends exceeded buybacks; that was true of only half the quarters between 1998 and 2009. Between 2010 and 2020Q3, S&P firms bought back $5.7 trillion in stock and paid $3.9 trillion in dividends, a combined total of $9.6 trillion. Over the same period, earnings totaled $10.6 trillion. So, they paid out 90% of earnings to shareholders. After all these years of heavy transfers to shareholders—which, it must be said, have been very friendly to stock prices—you have to wonder why corporations don’t have better things to do with their profits. It’s as if Corporate America has become an old rentier, more interested in collecting cash than investing and innovating. Maybe this pandemic-induced reduction in buybacks marks a change of heart, but we suspect things will go back to the old ways in a few quarters.

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Dwindling Labor Share

Here we revisit a familiar topic: the decline in the labor share of national income. We were prompted to revisit by a recent post to the St. Louis Fed’s website with the provocative title “Capital’s gain is lately labour’s loss” (Anglo spelling in original). It draws on the work of Loukas Karabarbounis and Brent Neiman (KN), which we’ve also discussed, though mostly in passing. KN’s data runs only through 2012; the St. Louis Fed post draws on their in-house FRED database to update it through 2017 for five major economies.

The declining labor share is interesting for several reasons. For decades, most economists assumed the share to be constant, which makes it far easier to develop economic models of production functions and economic dynamics. But the labor share is not constant. In their examination of 59 countries with at least 15 years of data between 1975 and 2012, BN found 42 with a declining labor share, measured against corporate value-added. A major reason is the declining cost of investment goods; the St Louis researchers present a series showing a near-relentless decline in the price of capital goods vs. consumer goods since 1948, with an acceleration in the 1980s. (The average decline from 1948 through 1979 was 1.6%; from 1980 to 2016, 2.6%.) That makes it easy to substitute capital for labor, to the detriment of labor’s share.

The extension of the data for the five years doesn’t change the fundamental story. The labor share in the five economies shown in the graph on the top of p. 7 was little changed between 2012 and 2017, despite sharp declines in the unemployment rates in most. You might think that a tightening labor market might boost labor’s share, but that hasn’t happened.

As the graphs above show, the declines happened to different degrees and over different intervals for the five countries shown. The declines range from 3 percentage points in the US to 8 in Canada; expressed as percentage (not point) declines, they range from 5% in the US to 11% in Canada (with the other four countries not far behind). Remember, it had been a well-established axiom in economics that this was not supposed to happen.

BN find that most of the decline in the labor share has happened within industries, so it can’t be explained by compositional changes such as the shift from manufacturing to services, which, among other things suggests things other than globalization are at work (given the varying exposure of different industries to international competition). And they also find a decline in the labor share within China, which makes it an unlikely culprit for the decline in the labor share in the richer countries.

They conclude that the decline in the price of investment goods accounts for about half the decline in labor’s share. An interesting question is what accounts for the other half. They don’t examine the effect of labor market deregulation and the declining power of unions, but those seem like worthy avenues of investigation, as they have been in other research pieces.

New Trends: EPOPs

There’s evidence of new trends in the employment/population ratios (EPOP), the wages of production workers, and in the expectations components of the University of Michigan confidence surveys: trends are stronger and views are brighter among those with lower levels of education, and recently wage gains for supervisory workers are dragging behind those of production workers in all but four sectors.

As we and many other analysts have noted, despite a very low unemployment rate, improvements in the employment/population ratio (EPOP) have been much less impressive. Part of this reflects an aging population, though not all. Our guess is that just over two-thirds of the gap between the early 2000s peak and the present is the result of an aging population. We’ve looked at some of those explanations in the past and will again for sure.

But what interests us now are movements in EPOPs by demographic group, as shown in the graphs below. Since the all-time peak in the EPOP in April 2000, the overall figure is down 4.1 points. Younger adults have been especially hard-hit (which is one reason the aging population story is an incomplete explanation)—though many of them are staying in school. But even prime-age workers are down. Older workers, however, have gained (though their levels are much lower than their younger counterparts).

Broken down by race and sex, only Hispanic women have a higher EPOP than they did in April 2000; Hispanic men are way down. Women overall have seen much smaller declines than men in their demographic group. By education, only those with less than high school have gained (though they’re a small and shrinking part of the workforce—7% now, compared to 10% in 2000). EPOPs among the more educated are down.

The story is somewhat different if we measure changes from the post-Great Recession low in the job market, February 2010. The overall EPOP is up 2.1 points, with all age groups participating, and the younger doing better than the older. Blacks and Hispanics of both sexes have done much better than whites. The education breakdown is striking though: those who didn’t finish high school have seen the strongest improvement in their EPOP, up nearly 5 points. Those with some college or a bachelor’s or higher have seen their EPOPs decline. This is not what you might expect. Since those with some college account for 26% of employment and with a bachelor’s or higher, 42%, the less educated third of the population have been doing a lot of work driving the overall EPOP higher over the last almost-nine years—with some assistance from the 20–24 set, who are not counted in the educational attainment EPOPs. We’re happy to see improvement for those with lower levels of education, but it’s something new.

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New Trends: Wages, Sectors, & Workers

Something new here too. Since 2006 wage gains among production workers are stronger than for all workers in all but four sectors, which suggests, of course, that managers are falling behind.

The Bureau of Labor Statistics has wage data for manufacturing production workers running back to 1939. In 1939, average hourly earnings for nondurable manufacturing were just 52% of those for durable manufacturing, 34 vs. 65 cents, but rose almost straight up in the 1940s to 80% and continued to drift up to their current 89%.

In the Trade, Transportation and Utilities sector, however, retail wages have lost ground, falling from 84% of TTU wages, to 80% currently, while wages for transportation & warehousing have fallen from 127% to 110%. Wages for wholesale trade have risen from 109% of TTU wages to 126%, while utility workers have seen their wages climb from 132% to 184%.

Back in 1964, when records were established for the goods producing and service providing sectors, wages were even, but by the 1980s wages for services had slipped to 80% of goods. They began a rocky climb back up and have levelled out at about 94% currently. Since 1964, construction and manufacturing wages have risen by similar percentages, but logging & mining wages have gained an additional fifteen percentage points.

We’re looking back to 2006 now because that is as far back as the all-worker series goes. Since then, wages in logging and mining have made the strongest gains, up 49%, to $28.96, followed by leisure & hospitality, up 47% to $14.11. Production workers in finance and in professional & business services made similar percentage gains, to about $27.00, as did construction work, to about $28.00. Since 2006, wages in services are up 40% and in goods up 36%.

Weakest gains for production workers are in manufacturing, transportation & warehousing, and retail trade, all up around 30% to $21.77, $22.07, and $16.15 for retail.

Since 2006, however, production workers have seen greater wage gains than all workers in all but four sectors, so managers are dragging that broad tranche down. In manufacturing production workers lagged all workers by 1 percentage point, in durable manufacturing by 3pps, in utilities by 5pps, and in information by 11pps. In leisure & hospitality, production workers were 6pps ahead; in retail trade, 5pps; and in logging & mining, construction, and education & health, all ahead by 4pps.

Over the last year, production workers wages are up over 5% in logging & mining, up 4% or more in information, retail trade, leisure & hospitality, and construction. In only other services, 1.9%, and finance, 1.6%, are they up less than 2 percent.

Over the last year wages for all workers in information, a struggling sector by other measures, are up 6%, up 4% or more in construction, retail trade, leisure & hospitality, and finance, followed by a string of 2-3% gains, with non-durable manufacturing, and transportation & warehousing reporting the weakness growth at 1%.

The wage picture is certainly complicated, with some of the largest percent gains occurring side by side between the highest and the lowest hourly wages, and quite a few “not as we expected” trends. By a number of metrics the different sectors are going in different directions, which further confuses an already cloudy picture.

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New Trends: Education and Party in Michigan

First, party: The University of Michigan collects data by political party only sporadically, so we don’t have a full history but, as we brought up at the time, last May, Richard Curtin, the guy who puts it all together, noted that in fifty years, the survey had never recorded as “dominant a political effect,” as it did in early 2017. Curtin expected that divergence to converge, but instead it widened.

Here’s the graph we ran:

During the years Trump has been President, Republican sentiment has averaged 117.6; while that of Democrats averaged 80, meaning Republican sentiment is running 46 points above the Obama years, while sentiment among Democrats is running just 13 points below. Both calculations exclude the depth of the recession years, when the divergence straitened to just 9 points; whoever thought we’d remember anything reassuring about those years.

That effect continues. In an October presentation Dr. Curtin identified his “major underlying issue,” as whether economic expectations surveys can retain their predictive ability given their “responsiveness to political rather than economic developments.” He quotes some observers who believe the partisan effect is “uniquely tied to the Trump administrations,” but his research suggests it is tied to our old friends income inequality and wage stagnation.

Second, educational attainment: Curtin also revisited the fact that the partisan divide between those with college-degrees remains “very low and insignificant,” and built on the striking observation he made back in May: the demographics really changed in 2017. Through 2016, generally, assessments of economic possibilities rose with income and education, and fell with age.

That changed in 2017.

Overall expectations for those with less than a high school degree had risen from 68 in October 2016 to 82 by August 2017, but fell for those with a college degree from 87 to 80. For those 65+ they rose from 2016’s 69 to 83 in 2017, while slipping a bit, to 86, for those 18 to 34 years old.
May 14, 2018
Sentiment for all three education terciles tracked each other closely throughout the series, all peaking around 2000, high school at 100 and the two college groups at 120, before falling raggedly to about 60 in the recession. The current divergence is led by an increase in the outlooks of the two lower attainment levels while those with a college degree are basically flat.

Curtin suggests that those with “relatively low job skills, as proxied by education, were the most affected by Trump’s election.” As we mentioned when we first brought this up, it’s a good thing if people with lower skills can do better.

But it’s a very bad thing if partisanship is putting a dent in the value of formerly trusted economic data.

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