Elevated profit margins workers kick back

Elevated Profit Margins Without Workers


Last week Goldman Sachs published a study on the average margins of businesses.  Obviously, some businesses are more profitable than others, but during an average business cycle the average of businesses changes.  Margins and the economy are counter cyclical.  When the economy is strong more competition drives down margins, and when the economy is weak margins improve.

Goldman questioned whether the fundamentals of capitalism are different now because the margins have been high since the recession beginning in 2009.  This reminded me of 2007 when oil was trading at $140 a barrel and Goldman put out a report that said oil was going to be at $200 a barrel soon, almost immediately before oil swiftly dropped to the mid-forties.

While economic turbulence always causes economist and business people to question the fundamentals of which they have always known.  But this is like looking out the window on a rainy day and thinking we are living through monsoon season.  The economy will eventually revert to the mean, however, there is something different now.

In 2009, when the recession really hit, businesses laid off 8% of their workforce.  This is normal but we have not seen the same type of hiring post-recession as previous.  Currently we are living through the transitional period of the technological revolution, and it took the recession for businesses to be forced to tighten the belt and actually implement many of the margin saving technologies now available.

The 1990’s were just the beginning of the technological revolution, they laid the groundwork, literally, the fiber optic cables, servers, and networks had to be built before anyone could take advantage.  Then entrepreneurs actually had to figure out how to use this new infrastructure to make businesses leaner and more efficient.  But with the debt fueled stimulus of the 2000’s, there was no need for businesses to actually use the new tech available to them.

It wasn’t until 2009 that companies were forced to try to save money by installing the new software and hardware that made the average 40-hour workweek far more efficient, and guess what, they realized they hadn’t actually needed those 12% of employees they had on payroll before.  Human talent is an asset, and a huge cost, especially under the new regulatory environment we live.

This technological revolution shift is taking place as we speak, causing elevated profit margins for longer than expected, as well as displacing many workers.  But just as the industrial revolution had shifted many workers from the field to the factory, there will be a long and difficult adjustment period for the future of our economy in this new tech reality.