Corporate Profits May Decline More in 2015
April 10, 2015
The first look at Q4 2014 corporate profits as published by the Bureau of Economic Analysis in the Gross Domestic Product (GDP) data shows that it declined slightly for 2014 as a whole, thus ending a five-year run during which growth in profits easily outpaced growth in nominal GDP, the latter acting as a proxy for top-line revenue growth.
Nominal GDP growth has been steady but notably unspectacular, averaging just 3.8 percent per year from 2010 on, easily outpaced by profit growth, at least until 2014. Obviously there was a good deal of "payback" in the 25 percent profit growth logged in 2010, but the broader point here is despite paltry gains on the revenue side corporate profits still grew each year. This growth reflects the extent to which the corporate sector managed the expense side of the ledger.
As declines go, the 0.81 percent drop in corporate profits in 2014 does not exactly qualify as "precipitous" and the level of profit remains exceptionally elevated. However, the concerns would be a matter of direction not of degree.
- If this is the year in which interest rates actually rise, the decline in profits will be more significant in 2015.
- Another factor that will weigh on corporate profits in 2015 is the stronger U.S. dollar. A stronger U.S. dollar means it is less favorable to translate foreign profits back into U.S. dollars, and exports of good produced in the United States is less competitive in the global market.
- The improving health of the domestic economy was not enough to prevent domestic profits from declining in 2014, and there is of course no guarantee further improvements in the health of the domestic economy in 2015 will lead to rising profits.
Source: Richard F. Moody, "Economic Outlook," Regions, April 2015.
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