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Profits Are Still Rising, Why Is the Fed Worried About Wage Growth?

I was more than a bit surprised to see the profit data this morning. I really did believe that the profit surge during the pandemic was a one-off, associated…

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I was more than a bit surprised to see the profit data this morning. I really did believe that the profit surge during the pandemic was a one-off, associated with supply-chain issues.

We can argue about how much of this increase was a predictable story, where profits rise due to shortages, and how much was about companies exploiting market power to jack up prices, but the fact that profit shares increased is not disputable. In any case, it was reasonable to expect that profits would return to their pre-pandemic shares after supply chains returned to normal.

That doesn’t look like what is happening, as shown below.

Source: BEA and author’s calculations, see text.

The profit share of corporate income rose to 26.8 percent in the fourth quarter from 26.3 percent in the third quarter. That is down only 0.5 percentage points from its pandemic peak of 27.3 percent in the second quarter of 2021 and well above the 24.3 percent average for 2019.[1]

This rise in profit shares really should have the Fed rethinking its inflation-fighting strategy. It is certainly true that the 6.0 percent rate of wage growth at the end of 2021 and start of 2022 was inconsistent with the Fed’s 2.0 percent inflation target. However, the current rate of roughly 4.0 percent is obviously consistent with the Fed’s target, if it is allowing companies to increase their profit share. This implies that we should actually want to see a somewhat more rapid pace of wage growth, unless we think profit shares need to be increasing indefinitely.

There are a couple of important qualifications here. First, we saw extraordinary productivity growth in 2023. Clearly corporations were the main beneficiaries of this growth. If this uptick was an aberration and we revert to something closer to the pre-pandemic growth rate, then profit shares may not continue to rise with a 4.0 percent pace of wage growth and could even edge back somewhat.

The other big qualification is that there is a large and unusual discrepancy between GDP measured on the income side and GDP measured on the output side. In principle these sums should be identical, but in a $28 trillion economy, they never come out exactly the same.

In recent decades, the income side has generally been about 0.5 percentage points higher than the output side. In the fourth quarter, the income side was 2.0 percentage points lower. We usually assume that the true figure lies somewhere between the two measures.

This would imply that the true sum of wages and profits is 1.0 to 2.0 percentage points higher than what is now reported. If that gap ends up being disproportionately wages or profits it could change the picture somewhat, but even if the full 2.0 percentage points all ended up being wage income it would not change the fact that the profit share is still far above its pre-pandemic level.  

The upshot is that it really is time for the Fed to declare “Mission Accomplished” and take its foot off the brake. If profit shares are rising, there is no reason for it to be trying to slow wage growth.   

[1] These figures take Line 8 (net operating surplus) from NIPA Table 1.14, minus Line 11 (Federal Reserve Bank profits) from Table 6.16D divided by Line 8 plus Line 4 (labor compensation) from Table 1.14.

The post Profits Are Still Rising, Why Is the Fed Worried About Wage Growth? appeared first on Center for Economic and Policy Research.

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Home Depot agrees to make its largest acquisition ever

The more than $18 billion deal is a massive bet on growing a key base.

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One of the silver linings of the past several years has been having a little extra time on our hands. 

During the lockdowns of the early 2020s, many of us were under stay-at-home or shelter-in-place orders, which gave us time to look around the house and face the projects we'd been putting off. 

Related: Sephora is suddenly abandoning a major market

And thanks to a shortage of labor and a gummed-up supply chain, hiring professional contractors was harder to come by. So many Americans tried their hand at doing projects themselves. 

Perhaps they were minor projects, like adding a fresh coat of paint to the powder room or changing out the hardware on the kitchen cabinets. But many folks went far deeper into the DIY space, replacing flooring, adding new decks to their outdoor spaces, or doing an entire kitchen remodel. 

Part of what made this process so accessible was the stimulus checks that went out to millions of Americans, so they had a little extra spending cash for these projects. Another was the proximity and convenience of home-improvement stores like Home Depot  (HD) .

With more than 2,300 stores across the U.S., Home Depot saw extreme growth during the pandemic. After the pandemic waned, the housing market boomed and professional labor got back to work, though. And the chain benefited from this surge, too. Home Depot's stock has about doubled since the early 2020s. 

Home Depot focuses on a growing base

A robust consumer base is great when times are good, but when inflation hits and individuals look to ease up on their expenses, a company can be more exposed to downside risk, like dwindling sales. 

This is partly why Home Depot has made a concerted effort in recent quarters to pivot its focus to professionals. Contractors, home improvement professionals, businesses, remodelers and designers have always been a part of Home Depot's core business, but they tend to be less cyclical than individual customers and tend to contribute more routine business. 

A customer carries a stack of wood at a Home Depot store.

Justin Sullivan/Getty Images

In March, Home Depot announced it would be opening up distribution centers across several key areas in the U.S. specifically for home improvement professionals. 

These centers are to focus more on bigger projects and will be about five times larger than the average Home Depot store, making it easier for professionals to navigate the centers and pick up more supplies. 

And on Thursday, Home Depot said it was making its largest acquisition yet to further its foothold in the contracting arena. 

Home Depot agreed to acquire SRS Distribution of McKinney, Texas, for $18.25 billion. SRS Distribution provides goods and materials for home-improvement contractors, like landscaping tools, roofing supplies, lumber, and pool materials. 

SRS Distribution employs about 11,000 people and operates 760 branches across 47 states. The acquisition is expected to close in January 2025. 

“Growing our share of wallet with the pro will fuel Home Depot’s next great growth chapter. SRS will help us better sell the whole project and capture a new customer we haven’t traditionally served,” a Home Depot spokesperson said. 

Home Depot's Q4 sales were down 3% from a year earlier as individual shoppers pulled back on their expenses, so focusing on a steadier growth trajectory is likely to bolster the retailer's sales in the coming years. 

"After three years of exceptional growth for our business, 2023 was a year of moderation. It was also a year of opportunity," Home Depot Chief Executive Ted Decker said on the earnings call in February.

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COVID-19 antibody discovery could explain long COVID

UVA Health researchers have discovered a potential explanation for some of the most perplexing mysteries of COVID-19 and long COVID. The surprising findings…

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UVA Health researchers have discovered a potential explanation for some of the most perplexing mysteries of COVID-19 and long COVID. The surprising findings could lead to new treatments for the difficult acute effects of COVID-19, long COVID and possibly other viruses.

Credit: Dan Addison | UVA Communications

UVA Health researchers have discovered a potential explanation for some of the most perplexing mysteries of COVID-19 and long COVID. The surprising findings could lead to new treatments for the difficult acute effects of COVID-19, long COVID and possibly other viruses.

Researchers led by UVA’s Steven L. Zeichner, MD, PhD, found that COVID-19 may prompt some people’s bodies to make antibodies that act like enzymes that the body naturally uses to regulate important functions – blood pressure, for example. Related enzymes also regulate other important body functions, such as blood clotting and inflammation.

Doctors may be able to target these “abzymes” to stop their unwanted effects. If abzymes with rogue activities are also responsible for some of the features of long COVID, doctors could target the abzymes to treat the difficult and sometimes mysterious symptoms of COVID-19 and long COVID at the source, instead of merely treating the downstream symptoms. 

“Some patients with COVID-19 have serious symptoms and we have trouble understanding their cause. We also have a poor understanding of the causes of long COVID,” said Zeichner, a pediatric infectious disease expert at UVA Children’s. “Antibodies that act like enzymes are called ‘abzymes.’ Abzymes are not exact copies of enzymes and so they work differently, sometimes in ways that the original enzyme does not. If COVID-19 patients are making abzymes, it is possible that these rogue abzymes could harm many different aspects of physiology. If this turns out to be true, then developing treatments to deplete or block the rogue abzymes could be the most effective way to treat the complications of COVID-19.”

Understanding COVID-19 Abzymes

SARS-CoV-2, the virus that causes COVID, has protein on its surface called the Spike protein. When the virus begins to infect a cell, the Spike protein binds a protein called Angiotensin Converting Enzyme 2, or ACE2, on the cell’s surface. ACE2’s normal function in the body is to help regulate blood pressure; it cuts a protein called angiotensin II to make a derivative protein called angiotensin 1-7. Angiotensin II constricts blood vessels, raising blood pressure, while angiotensin 1-7 relaxes blood vessels, lowering blood pressure. 

Zeichner and his team thought that some patients might make antibodies against the Spike protein that looked enough like ACE2 so that the antibodies also had enzymatic activity like ACE2, and that is exactly what they found. 

Recently, other groups have found that some patients with long COVID have problems with their coagulation systems and with another system called “complement.” Both the coagulation system and the complement system are controlled by enzymes in the body that cut other proteins to activate them. If patients with long COVID make abzymes that activate proteins that control processes such as coagulation and inflammation, that could explain the source of some of the long COVID symptoms and why long COVID symptoms persist even after the body has cleared the initial infection. It also may explain rare side effects of COVID-19 vaccination.

To determine if antibodies could be having unexpected effects in COVID patients, Zeichner and his collaborators examined plasma samples collected from 67 volunteers with moderate or severe COVID on or around day 7 of their hospitalization. The researchers compared what they found with plasma collected in 2018, prior to the beginning of the pandemic. The results showed that a small subset of the COVID patients had antibodies that acted like enzymes.

While our understanding of the potential role of abzymes in COVID-19 is still in its early stages, enzymatic antibodies have already been detected in certain cases of HIV, Zeichner notes. That means there is precedent for a virus to trigger abzyme formation. It also suggests that other viruses may cause similar effects.

Zeichner, who is developing a universal coronavirus vaccine, expects UVA’s new findings will renew interest in abzymes in medical research. He also hopes his discovery will lead to better treatments for patients with both acute COVID-19 and long COVID.

“We now need to study pure versions of antibodies with enzymatic activity to see how abzymes may work in more detail, and we need to study patients who have had COVID-19 who did and did not develop long COVID,” he said. “There is much more work to do, but I think we have made a good start in developing a new understanding of this challenging disease that has caused so much distress and death around the world. The first step to developing effective new therapies for a disease is developing a good understanding of the disease’s underlying causes, and we have taken that first step.” 

Findings Published

The researchers have published their findings in the scientific journal mBio, a publication of the American Society for Microbiology. The research team consisted of Yufeng Song, Regan Myers, Frances Mehl, Lila Murphy, Bailey Brooks, and faculty members from the Department of Medicine, Jeffrey M. Wilson, Alexandra Kadl, Judith Woodfolk.

“It’s great to have such talented and dedicated colleagues here at UVA who are excited about working on new and unconventional research projects,” said Zeichner. 

Zeichner is the McClemore Birdsong Professor in the University of Virginia School of Medicine’s Departments of Pediatrics and Microbiology, Immunology and Cancer Biology; the director of the Pendleton Pediatric Infectious Disease Laboratory; and part of UVA Children’s Child Health Research Center.

The abzyme research was supported by UVA, including the Manning Fund for COVID-19 Research at UVA; the Ivy Foundation; the Pendleton Laboratory Fund for Pediatric Infectious Disease Research; a College Council Minerva Research Grant; the Coulter Foundation; and the National Institutes of Health’s National Institute of Allergy and Infection Diseases, grant R01 AI176515. Additional support came from the HHV-6 Foundation.

To keep up with the latest medical research news from UVA, subscribe to the Making of Medicine blog at http://makingofmedicine.virginia.edu.


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Initial claims remain somnolent, while continuing claims pop slightly

  – by New Deal democratThe divergence in the trends between initial and continuing claims continued this week, as the former continued their somnolent…

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 - by New Deal democrat


The divergence in the trends between initial and continuing claims continued this week, as the former continued their somnolent good news, while the latter had a slightly disconcerting pop.

Initial claims declined -2,000 to 210,000, and the four week average declined -750 to 211,000. On the other hand, with the usual one week delay, continuing claims rose 24,000 to 1.819 million:



The first two are in the same range they have been in for the past 4 to 6 months, while continuing claims are at their highest number but for 2 weeks in the past two years.

On the more important YoY basis for forecasting purposes, initial claims are down -9.5%, and the four week average is down -7.0%, the best YoY comparison in the past 12 months. Continuing claims are up 7.2%, but this is the second lowest YoY comparison in the past 12 months:

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Now let’s update the forecast of the Sahm rule. With last month’s 2 year high in the unemployment rate, I’ve been wondering whether, because unemployment includes both new and existing job losses, it followed continuing claims more than initial claims (although initial claims leads both). The historical graphs, which I posted two weeks ago so I won’t repeat now, indicated that continuing claims also lead the unemployment rate, although with much less of a lead time.

With that in mind, here is this week’s update of the post-pandemic record for the past two years on a monthly YoY% basis (unemployment rate YoY shown in red):



Since on a monthly basis so far initial claims are significantly lower YoY, and continuing claims a little over 7% higher, I expect the unemployment rate to be either unchanged or slightly higher YoY in the next several months. This would take it back down to the 3.7% area.

Here’s the same comparison on an absolute rather than YoY basis:



This similarly suggests a slight decline in the unemployment rate to 3.7% or 3.8%. Since the lowest three month average of the unemployment rate in the past 12 months was 3.5%, it would take an increase to 4.0% averaged over three months to trigger the Sahm rule. Both initial and continuing claims indicate that is not going to happen in the immediate future.

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