Abstract

In this paper we examine the macroeconomic information content of aggregate earnings from the labor market’s perspective. We use insights from the labor economics literature to characterize the information contained in aggregate GAAP earnings and its components that is relevant for predicting aggregate job creation and destruction, labor income, and unemployment. Our results suggest that not only does aggregate earnings news convey information about future labor market aggregates, but its information content is incremental to other macroeconomic variables at near-term horizons. Further, the source of this information stems primarily from two earnings components: aggregate core earnings and special items. Core earnings news signals persistent changes in economy-wide profitability that anticipate aggregate job creation and destruction up to four quarters ahead, while special items contain news only about job destruction at horizons of up to two quarters. Taken together, our results suggest that aggregate GAAP earnings contain useful information about future labor market conditions, with the nature of such information varying across earnings components.

Introduction

Prior research finds that aggregate GAAP earnings predict future GDP growth and attributes this finding to a “corporate profit” channel, whereby aggregate earnings predict the corporate profit component of future Gross Domestic Income (GDI), the income-based equivalent of GDP (e.g., Konchitchki and Patatoukas 2014a). Corporate profits, however, represent only a small portion of GDI (on average about 9% over the past 10 years). Thus, if aggregate earnings convey macroeconomic information primarily through corporate profits, the role of accounting information for gauging the health of the macroeconomy is limited. Such a view is inconsistent with recent evidence that aggregate earnings news conveys important information about future inflation and monetary policy (Gallo et al. 2016; Shivakumar and Urcan 2017). In this paper, we focus on another aspect of the macroeconomic information contained in GAAP earnings—the link between aggregate GAAP earnings and the labor market.