Corporate Profits Cycle Under The Microscope

1742 Words7 Pages
US Profits Cycle Under the Microscope It seems hard to believe that the current US economic expansion is the fourth longest in duration since the Great Depression. Despite growth averaging “only” 2% since the 2009 Q2 trough, the performance of corporate profits was impressive, at least up until 2014 H1. The structure of the US economy has shifted with the passage of time, notably the gravitation away from manufacturing to services. This shift has, therefore, impacted the composition of corporate profits. Historically, corporate profits have grown in tandem with nominal GDP over the course of the economic cycle, but, more recently, earnings have been able to outpace economic growth due to a number of special factors, both endogenous and exogenous. Some of these tailwinds, such as falling interest expenses and unit labour costs, are now becoming obstacles for further corporate profits growth. There are three main drivers behind corporate profits expansion: 1) operational gearing, 2) labour productivity, and 3) interest expenses. Meanwhile, there is also the important issue of pricing power to be considered. The prevalence of low inflation in the US economy is seemingly indicative of limited corporate pricing power. Historically, corporations have raised selling prices to preserve profit margins due to rising cost pressures, notably labour. Growing pricing power is, therefore, synonymous with the economy entering overheating territory. Continued economic growth will
Open Document