The question for American Business is whether or not the last two years will wind up producing the highest profits on record or merely the fastest growing profits on record. Deutsche Bank is putting its money on the highest profits on record. From Catherine Rampbell

“Not only are we seeing a tremendous V-shaped recovery in corporate profits, but we are in fact seeing the biggest corporate profit recovery ever,” said Joseph A. LaVorgna, the chief United States economist at Deutsche Bank. “That means that the equity market is dirt cheap. That also means that companies have more money than they know what to do with.”

To be clear, I think soaring corporate profits are great and wonderful accomplishment that the Treasury and Fed should rightly be proud of. If the economic collapse were deeper than it was, we wouldn’t see these type of numbers.

However, the job is not done and the clear concern moving forward is not on the cost side. Unit labor costs are falling. That means workers are getting relatively cheaper to hire.

FRED Graph

Perhaps, regulatory uncertainty is so high that its overwhelming the general trend of falling labor costs and corporations fear that the good times are coming to an end.

However, I still maintain that the key driver is not on the cost side but on the sell side, where business is still reeling from the largest drop ever recorded. The Commerce Department started recording in 1947.

FRED Graph

When you ask businesses about their problems they report poor sales. Which is consistent with the fact that sales really are low.

Now, at the same time I am sure a lot of managers talk to reporters about their managing the new political climate. This is because navigating the political climate is something over which the manager has control.

Aggregate demand is simply the air that business breathes. It doesn’t make sense to say, “yeah what I am working on today is getting Americans generally to shop and invest more,” because the average CEO has no control over this. She simply takes it as given.

The only thing she can do to increase sales is to lower relative prices, either by offering more innovative products or cutting the headline price. Both, of which businesses seem to be doing.

Indeed, that’s why consistent price cuts across all businesses are a sign for economists that Aggregate Demand is falling.

However, the basic issue that Aggregate Demand is low doesn’t percolate up for the average manager because there is nothing that she can to change it.

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