Not your grandpa’s aggregate demand shortfall

Andrew Smithers, of the consultancy Smithers & Co, said in December that US profit margins were at a record level and had expanded in the past three years even as output fell.

“Margins have been as good as it gets,” says Graham Secker, European equity strategist at Morgan Stanley. He adds corporate profitability over the past 20 to 30 years has gained from factors such as technological advances, falling corporate tax rates, low funding costs and declining commodity prices.

Analysts at Citigroup say operating margins at S&P 500 companies are close to the highs of 2007, partly because of the fall in unit labour costs. “A reluctance to hire more employees as well as outsourcing to lower-cost alternatives have left management teams with lean and mean companies,” they say.

Some analysts remain optimistic about prospects for the US. Gerard Lane, equity strategist at Shore Capital, says: “Even though US margins are extended, they do not necessarily have to fall at the moment.

“As a long-term trend, these businesses are gaining more of their profits from overseas. It is only when unit labour costs at S&P companies start growing at more than 2 per cent a year that margins will start to fall.”

Here is more, from the FT.


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