WASHINGTON - Judging from corporate profits, we should be enjoying a powerful economic recovery.
The drop in profits in the recession was about a third, apparently the worst since World War II. But every day brings reports of gains.
In the second quarter, IBM's earnings rose 9.1 percent from a year earlier. Government statistics through the first quarter (the latest available) show that profits have recovered 87 percent of what they lost in the recession.
When second-quarter results are tabulated, profits may exceed their previous peak.
The rebound in profits ought to be a good omen. It frees companies to be more aggressive.
They're sitting on huge cash reserves: a record of $838 billion for industrial companies in the Standard & Poor's 500 index (companies like Apple, Boeing and Caterpillar) at the end of March, up 26 percent from a year earlier.
"They have the wherewithal to do whatever they want - hire; make new investments; raise dividends; do mergers and acquisitions," says S&P's Howard Silverblatt.
Historically, higher profits lead to higher employment, says Mark Zandi of Moody's Economy.com. Except for startups, loss-making companies don't generate many new jobs.
So far, history be damned. The contrast between revived profits and stunted job growth is stunning.
From late 2007 to late 2009, payroll employment dropped nearly 8.4 million. Since then, the economy has recovered a scant 11 percent of those lost jobs.
Companies are doing much better than workers; that defines today's economy.
The most obvious explanation is that the relationship between labor and capital (to borrow Marxist vocabulary) has changed.
Capital has gotten stronger; labor has weakened.
Economist Robert J. Gordon of Northwestern University argues that the "shift of executive compensation towards much greater use of stock options" has made corporate managers more zealous cost-cutters in recessions and more reluctant hirers early in recoveries.
Lowering the headcount is the quickest way to restore profits and, from there, a company's stock price.
In a new study, Gordon dates the economy's changed behavior to the 1980s. Until then, companies tended to protect career workers, and unemployment followed a path predicted by economist Arthur Okun in a famous 1962 paper.
But now, unemployment exceeds Okun's formula, and "jobless recoveries" have become standard.