REUTERS/Adrees Latif

A Chipotle Mexican restaurant in midtown Manhattan, New York.

Job growth has been weak and wages have gone nowhere since the great recession.

But surprisingly, we've seen corporate profits recover swiftly and surge to record highs.

The labor-market story and the corporate-profit story are very closely related. Simply put, the American consumer has been getting squeezed to line the pockets of corporate America and its investors.

However, we're now seeing more evidence that businesses will attempt to bolster their profits by raising prices on their customers. Chipotle and Netflix recently announced that they would soon be raising the prices of their goods and services.

Up front, most consumers may not even notice the price hikes because they're so small. But their capacity to spend will get squeezed.

And ultimately, without a jump in hiring or wages, this could all backfire on corporate America in the form of crumbling sales and collapsing profits.

Corporate Profit Margins Have Never Been Fatter

Fattening profit margins have enabled corporate America to deliver record earnings amid modest revenue growth.

Much of these profit margin gains have come from companies cutting costs (for example, laying off workers) and improving efficiencies (like making workers produce more stuff with little or no pay raise).

But these actions have limits.

And corporate America is scrambling to do what it can to maintain or further boost its profit margins in order to, one, blunt the effects of inflation, two, maintain earnings growth, and, three, please investors.

But what do you do when you can't cut costs anymore?

Passing Costs To The Consumer

We recently got two examples of price hikes that anyone in America should notice:

Chipotle Mexican Grill 's CFO announced it would raise prices by mid-single digits (~5%) by the end of the quarter. This comes as the burrito chain faces rising food costs. "A 5% increase would raise the cost of Chipotle's chicken burrito from $7.81 to about $8.20 in New York," reported BI's Hayley Peterson.

's CFO announced it would raise prices by mid-single digits (~5%) by the end of the quarter. This comes as the burrito chain faces rising food costs. "A 5% increase would raise the cost of Chipotle's chicken burrito from $7.81 to about $8.20 in New York," reported BI's Hayley Peterson. Netflix is raising the prices of new subscriptions by $1 to $2 per month. That would represent a 12%-to-25% increase over a $7.99 subscription. "T he company justified the price increase by saying it has greatly expanded its streaming video library," reported BI's Steve Kovach. "It'll use the new revenue to acquire even more content. "

What does it all mean?

On the surface, it is a few dollars and cents. And in the long run, some of these price hikes will be offset for the consumer elsewhere. For example, a more efficient car will help save on gas.

But experts agree that, in aggregate, prices will rise.

We Need A Raise

Unfortunately wage growth has largely been stagnant, which means something will eventually have to give.

"Consumer spending is around all-time highs as a share of U.S. GDP, while labour income is at multidecade lows," said Gerard Minack of Minack Advisors. "This has been wonderful for corporates: consumer spending boosts revenue, while labour costs are the corporate sector's largest single cost. Rising consumer spending and falling wage share of GDP is great for profit margins."

"Now, however, further wage weakness threatens to suffocate the U.S. consumer," he added.

It might take regulatory changes. It might take tax hikes. It might take a massive destabilizing protest. But eventually, something will have to get corporations to channel some of that money back to consumers or else they risk feeling pain on their top lines.

The good news is that expectations for wage growth are rising. We'll just have to see if that materializes.

gerard minack minack advisors More

Business Insider, Minack Advisors



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