When Will Record Corporate Profits Translate to Jobs?

It may not have felt like a red-hot summer, but in the three months between July and September, US businesses netted more money than in any quarter since the government started keeping records.

Job seekers wait in line to have their résumés reviewed at the second annual Anaheim/Orange County Job Fair.
Robyn Beck | AFP | Getty Images
Job seekers wait in line to have their résumés reviewed at the second annual Anaheim/Orange County Job Fair.

It could be a good sign for the jobs picture.

American companies produced profits at an annual rate of $1.66 trillion, according to the Commerce Department.

While the overall economy grew at an annual rate of 2.5 percent, profits increased 11.5 percent, and marked the seventh straight quarter of growth since the 2008 financial crisis.

The corporate profit headlines took a back seat to market concerns about the Irish debt situation and the Fed's lowered outlook for fourth quarter gross domestic product.

But economists say we shouldn't ignore the profit rebound.

"I think what investors are missing - and even the Federal Reserve - is the phenomenal health of the corporate sector," Joe Lavorgna of Deutsche Bank said.

"That has always been a leading indicator of hiring trends."

Much of the profit growth has come from the steep cost-cutting companies underwent after the fall of Lehman Brothers in 2008, with massive job cuts well into 2009.

Despite being awash in cash, businesses have been reluctant to boost hiring.

"Profit margins for S&P 500 firms are now above 9 percent - nosebleed territory," S&P chief investment strategist Sam Stovall said.

But revenue growth has not kept pace with profits, he noted. "Revenues are going through a U-shaped recovery while earnings are going through a V-shaped recovery."

Lavorgna believes companies are at an inflection point when it comes to hiring. With strong profit margins, and a record amount of cash, and continued economic growth, he sees private employers hiring up to 200-thousand jobs a month in the coming year.

"Productivity growth is starting to slow," he argued. "If there's any incremental demand, that will have to be met through hiring."

Aladdin Capital Chief Economist Constance Hunter agrees job growth could be stronger than many expect, after the upward revision to third quarter GDP growth.

"We expect jobs growth to pick up steam in the first half of 2011 with monthly payroll gains of 165K to 230K," Hunter wrote in a note to clients. "This should push the unemployment rate below 9 percent in the second half of 2011."

Corporate confidence is beginning to rebound along with profits, and if the lame duck congress extends the Bush era tax cuts, it will give business leaders more confidence about hiring again, according to Sam Stovall of Standard and Poor's.

Still, the jobs recovery will take time.

"Our belief is we will be dipping into the 8-percent unemployment level as we're heading into 2012," Stovall said.