Typically, a slow down in profit margin growth would be a worrying sign about the strength of businesses within an economy, and suggest demand is down or costs or rising.
But that’s not what the current slowdown in the U.S. is implying, according to Societe Generale’s Aneta Markowska.
She writes that this profit correction is just a sign companies are now hiring and investing, rather than just cutting costs.
The breakneck margin expansion during late 2009 and early 2010 was driven by unprecedented productivity gains which exceeded 6% at the peak of the cycle. Those productivity gains simply could not be sustained and are now giving way to employment growth. This correction in productivity growth may explain why the unemployment rate has corrected so sharply in the past 6 months despite more moderate output gains.
But financial profit margins are still booming, and according to Markowska, that’s somewhat worrying.
Pre-tax profit margins are now above levels seen before the crisis. In the heyday of the credit boom, these levels were seen as a reward for efficient resource allocation which is at the heart of capitalism. In hindsight, the financial sector did a very poor job allocating savings. Not only that, it probably crowded out other potentially more productive undertakings. Nothing seems to have changed on that front.
Note the recent (and long-term) divergence between the financials and broader market:
Photo: Societe Generale