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Profits jump, Dow nearing record but unemployment remains stuck at high rate

With the Dow Jones industrial average flirting with a record high, the split between American workers and the companies that employ them is widening and could worsen in the next few months as federal budget cuts take hold.

That gulf helps explain why stock markets are thriving even as the economy is barely growing and unemployment remains stubbornly high.

With millions still out of work, companies face little pressure to raise salaries, while productivity gains allow them to increase sales without adding workers.

"So far in this recovery, corporations have captured an unusually high share of the income gains," said Ethan Harris, co-head of global economics at Bank of America Merrill Lynch. "The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist."

The result has been a golden age for corporate profits, especially among multinational giants that are benefiting from faster growth in such emerging economies as China and India.

These factors, along with the Federal Reserve's efforts to keep interest rates ultralow and encourage investors to put more money into riskier assets, prompted traders to send the Dow past 14,000 to within 75 points of a record last week.

While buoyant earnings are rewarded by investors and make U.S. companies more competitive globally, they have not translated into additional jobs at home.

Other recent positive economic developments, such as a healthier housing sector and growth in orders for machinery and some other durable goods, also have encouraged Wall Street but similarly failed to improve the employment picture.

Unemployment, after steadily declining for three years, has been stuck at just less than 8 percent since September.

With $85 billion in automatic cuts taking effect between now and Sept. 30 as part of the so-called federal budget sequester, some experts warn economic growth will be reduced by at least half a percentage point. But although experts estimate sequestration could cost the country about 700,000 jobs, Wall Street does not expect the cuts to substantially reduce corporate profits -- or seriously threaten the recent rally in the stock markets.


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