Tags: corporate | profits | costs | rates

WSJ's Lahart: Problems May Lurk on the Profit Front

By    |   Friday, 28 Mar 2014 01:14 PM

Government data Thursday showed corporate profits continue to grow faster than the economy, and that may be a sign of trouble ahead, says Justin Lahart of The Wall Street Journal.

Corporate profits as a percentage of GDP, a proxy for profit margins, reached a record 11.1 percent in the fourth quarter.

And what's pushing profit margins higher? Cost-cutting, Lahart says. "They [companies] have been slow to hire and slow to raise wages." Private-sector employee compensation has lagged inflation during the past five years.

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Capital spending has been sluggish, too, rising just 0.8 percent annually over the past five years for members of the Standard & Poor's Composite 1500 index, Lahart notes.

Low interest rates have helped companies cut their debt costs, he says.

But, "keeping costs low by refraining from hiring or not replacing equipment can only be done for so long," Lahart writes. "And long-term interest rates look more likely to rise than fall over the next year."

Companies will still want high profit margins, he says.

"Barring an unforeseen surge in economic growth, meeting Wall Street's piqued expectations will tempt companies to continue underinvesting. Ultimately, though, that leads to deteriorating sales, making it even harder to preserve profits."

Tim Fernholz of Quartz maintains that the strong gain in earnings indicates the stock market isn't in a bubble. "Sure, valuations are high, but that’s in part because profits are so high," he writes. After-tax profits gained 4.8 percent in the fourth quarter from a year earlier.

"This situation won’t continue forever, but if corporate profits are higher than they have ever been, it makes sense that the stock market is approaching record value, too."

Editor’s Note:
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Government data Thursday showed corporate profits continue to grow faster than the economy, and that may be a sign of trouble ahead, says Justin Lahart of The Wall Street Journal.
corporate,profits,costs,rates
296
2014-14-28
Friday, 28 Mar 2014 01:14 PM
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