What Does the Fall in US Corporate Profitability Mean for the Global Market?
Date: 6 May 2016 Share on Twitter Share on Facebook
The United States is currently in the midst of a profits recession. Financial fear has recently shifted from worrying about a rise in interest rates to concern over economic growth (or lack thereof). This has since escalated as a result of concerns over an impending recession in the US. And, while there is pretty of evidence to set the mind at rest over this particular issue, there are growing fears that a more specific type of recession has already been inflicted: a profit recession. While people have been celebrating over the fact that most major economies are now in growth mode, they seem to be ignoring the fact that earnings have not yet rebounded, and are running at a lower than ideal rate.
All in all, economic growth in the US has tended to stay at around a low figure of 2 per cent for the last few years, with little change to that coming since the end of the 2009 recession. While profits took a dive during the recession then fought back in the early days after it, they’ve been running at a low rate ever since – something analysts believe is irrevocably linked to slow international economic growth (particularly given China and South America’s underperforming) and only moderate expansion in the US.
If it really does signal that a US recession is coming, such a recession would clearly have a severe impact on the global market. However this seems reasonably unlikely, given that for the first time in years the global trend is for economies to be expanding – such as in the US and Japan.
But what does this mean for the rest of the world?
And yet despite all this, falling corporate profitability looks to have serious consequences not just for the US markets, but for the global ones too. Experts warn that a fall in profits could damage business investment, as well as putting more pressure on the price of stocks which analysts consider to be cheaper and therefore low-risk. In the US especially, it looks like a fall in profits will prove difficult for the officials at the Federal Reserve were recently planning to raise interest rates from the last seven years’ worth of near-0% figures. Even consumer spending, which seemed to be a lone upshot of recent trends, seems to be suffering – something particularly concerning, given that it accounts for around two-thirds of US and international economic output. In the final quarters of last year, it was increasing at a rate lower than forecasted.
All in all though, it looks as if US companies are facing another year where revenues fall and earnings prove to be lower than expected, despite very high expectations for stock prices. And it seems that this may not be a short-lived trend, since the minimum wage in America has risen, off-setting higher profits. China has also, as of yet, done nothing to address its struggling economy: combined with a fall in US profits, the other power player in the world faces either a bailing out of its banks or a Japanese-esque decade of recession. And with the Federal Reserve looking to raise interest rates, the outlook for the rest of world is not positive, given the weak performance of its two greatest economies.
But it is perhaps too early to be thinking of disaster, despite the above: certain global trends suggest profits are set to rebound, despite the fact that we’re approaching the end of this current economic cycle. This is testified to by the Purchasing Managers Index, which is usually a good indicator of future growth and earnings trends.