a strong economy, tightening labor market and an expected stimulus package from president-elect donald trump would seem to be a recipe for higher inflation and tightening by the federal reserve. but a close look at gross-domestic-product data released tuesday shows why inflation may not jump and why the fed, while likely to raise rates next month, could remain cautious. the reason lies in corporate profits, profit margins and the share of income going to labor. revisions from the commerce department on tuesday showed that gross domestic product grew at a 3.2% annual rate in the third quarter, better than the preliminary estimate of 2.9%. the updated figure might be low. gross domestic income<u+2014>a measure that in theory should be the same as gdp, and that research has shown tends to be a more accurate reflection of the economy <u+2014>grew by 5.2%. corporate profits were also strong, benefiting not just from a growing economy, but a pickup in companies<u+2019> slice of it. domestic profits after taxes, but not adjusted for inflation, rose 9.9% from the second quarter. as a result, profit<u+2019>s share of gdi<u+2014>an economywide measure of profit margins<u+2014>increased to 6.2% from 5.7%. that isn<u+2019>t as high as the 7.3% registered in the fourth quarter of 2011, but it is well above the average share of 5% over the half-century that preceded the last recession. a big reason that margins have been so strong in recent years is that less income has been flowing to workers. employee compensation came to 53.6% of gdi in the third quarter. it has been rising steadily from its low of 52.2% logged in the third quarter of 2014, but is well off the average of 56% over the 50 years preceding the recession. for the fed, labor<u+2019>s diminished share of the economy may count as an argument not to jump the gun on rate increases. how much workers are paid isn't part of the fed<u+2019>s remit, but their situation might help limit inflation. that is because companies faced with a tight job market might have to raise wages at a faster pace<u+00a0>to attract workers. but since working households haven<u+2019>t seen income gains since the 1990s, the companies may struggle to make price increases stick. that could keep inflation below the 2% rate the fed is aiming for. the impact of higher wages would be felt in profit margins, which could decline toward their long-term average. but if the economy, and therefore sales, are growing at a faster clip, that is a pill that companies, and their shareholders, might find easy to swallow. write to justin lahart at justin.lahart@wsj.com
fed won<u+2019>t stand in workers<u+2019> way on wages  - wsj
justin lahart