Jobless Profits Aren’t a Mystery, But They Are an Augury

What Happened

Analysts at sell-side firms have highlighted an apparent puzzle in the most recent economic data: profits are soaring, but hiring is not.

Pre-tax corporate profits have surged, margins have grown, and labor’s share has fallen, even as employment in cyclical private industries has largely been flat since 2022. On the surface, the historical relationship looks broken: profit growth "should" be translating into stronger hiring, but it isn't.

But two things make that historical comparison misleading and an augury:

1. The economy now needs far fewer new jobs each month to keep unemployment stable.
   1. Demographics have pushed down the neutral pace of job creation sharply. The Fed’s breakeven-employment estimates show a drop from about 149,000 jobs per month in the 1990s to 107,000 in the 2000s, 82,000 in the 2010s, 87,000 in 2025, and just 18,000 in 2026e.

2. The profit boom has been unusually concentrated.

1. Most of the recent increase in S&P 500 earnings came from a narrow set of sectors, above all technology and communications services.

What It Means

• The sectors producing the most profits are not labor-intensive, and becoming less so.
  • This is not unprecedented, but it is unusual to be so intense and sustained.