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Author Topic: Corporate Profits Stunt Economies  (Read 1027 times)

Corporate Profits Stunt Economies
« on: May 11, 2012, 12:43:29 PM »
http://blogs.wsj.com/source/2012/04/25/ ... economies/


We’re in the thick of another corporate earnings season and companies are once again reporting blowout profits.

Yet economies on both sides of the Atlantic are struggling. The U.K. and a raft of countries along the euro-zone periphery are in recession, economies at Europe’s core are weakening and even the U.S. is looking like it’s running out of steam.

How do you square the one with the other? Maybe by blaming general economic weakness on particular corporate strength.

And what strength. In the latest quarter, more than 80% of S&P 500 reporting companies have beaten earnings expectations. Profit margins are at historic highs even as the U.S. economy registers an unusually slow rebound from its deepest downturn since the Great Depression. The story’s similar in the U.K.

So what do profits have to do with slow recovery?

The link is the Anglo-Saxon bonus culture, according to Andrew Smithers, of Smithers & Co, an independent economic consultancy.

Roughly speaking, here’s the logic. The shift to profit-related pay, or bonuses, has turned the focus on to reported profits. In the U.S., these profits have, over the past decade, but particularly since the start of the recession, become six times more volatile than profits in the national accounts, having been no different before that time.

The drive to boost published profits has pushed down business investment in both the U.S. and the U.K. This has boosted the relative wealth of owners of capital compared to the rest of the population. Because the rich consume less than the rest, this has had a dampening effect on wider incomes and economic growth.

Only fiscal policy is able to maintain wider economic growth in this environment. Any shift to reduce deficits will prove a disproportionate drag on wider economic growth.

Of course, profit distortions don’t just work in one direction. At some point, the U.S. and U.K. corporate sectors will hit a bump. At that point, reported profits are likely to fall considerably further than those in the national accounts.

And as governments need to cut their deficits they will increasingly look to where the money is: corporates. Ultimately, this could force firms to rethink how they run their businesses, perhaps aiming more towards long-run returns rather than short-term profits.

Whatever happens, the era of high margins won’t last forever.
« Last Edit: December 31, 1969, 07:00:00 PM by Guest »

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Re: Corporate Profits Stunt Economies
« Reply #1 on: May 11, 2012, 03:16:02 PM »
When companies earn profits, they have a few options of what to do with that money:
1) Reinvest that money within the company - upgrade equipment.  The money spent on equipment equates to boosted sales for other companies (who by the way will likely enjoy their own boost in profits as a result).
2) Raise salaries and/or hire more people.  Unfortunately, this isn't always as simple as it may seem, especially if there are few available workers with the right skills
3) Pay for research and development.  This can lead to future dividends for the company, but in the short term it tends to have little immediate payback.  Some companies invest a lot in this, while others do not.
4) Pay it out to shareholders, directly or indirectly.  Many middle class are in this group due to their investment holdings in 401Ks or IRAs.  Dividends represent a direct pay-out, while increased share price represents indirect form of payout.

From what I've seen, a significant amount of that increased profit lately seems to be getting sent to the 4th option.  Long term this means that people who are not invested in the market may be the ultimate losers.
« Last Edit: December 31, 1969, 07:00:00 PM by Guest »

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