The Lehmann
Letter (SM)
Corporate
profits have had an extraordinary run in the past decade. The dot-com bust of
2001, which many thought would be the demise of corporate earnings, quickly became
the launching pad for a record climb.
Growth in profit
margins (Profits = Profit margins X Sales volume) enabled this increase in
total profits. The chart reveals that profit margins began to rise above their
historic range during the dot-com boom of the 1990s, and then reached all-time highs
from 2002 to 2012.
Corporations
had two factors on their side: Rising productivity (efficiency) and meager wage
gains. The 2008 - 2009 recession aided profit margins when workforces shrank
more than output and wages consequently lagged. You can see from the chart that
profit margins are at their peak.
Profit
Margins
(Recessions
shaded)
Yesterday the
Bureau of Labor Statistics reported that productivity (efficiency) fell in the
first quarter but employees' real compensation fell even more rapidly. As a
result the cost of producing a unit of output grew less rapidly than the price
businesses received for that output. The result: Profit margins remain at
historic highs.
In Sum: Falling
compensation more than offset falling productivity (efficiency), maintaining profit
margins at record levels. Business continues to enjoy an extraordinary era.
(To be fully
informed visit http://www.beyourowneconomist.com/)
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