My expectation for 2014 has been that corporate / business sales should grow by 6 - 6.5%
and that profits should do even better via improved operating leverage and a firming of
pricing power. Output growth in real terms was stunted in Jan. with the bad weather, but
appears to be improving both in terms of production and new order flow. The surprise so
far this year has been the continuing low rate of inflation and the negative consequences for
business pricing power. So far this year, my pricing / cost ratio has been modestly negative
which normally makes it difficult to increase operating profit margin. However, in the
finance sector, credit growth is expanding which will boost net interest margins and fees
could rise from stronger underwriting and M&A activity (Bank stocks have done a little
better than the broad market since autumn 2013).
Despite the outlook for stronger global economic growth over the first half of this year,
my inflation pressure gauges have been dormant as operating rates have yet to rise fast
enough to offset capacity slack, particularly in China. In turn, here in the US, wage
growth remains low although real incomes are rising because inflation has been so low.
That is OK for the real economy now, but the low wage growth could easily be pressured
in real terms if cyclical inflation pressures finally emerge.
More on profits and my coincident economic indicator later next week.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!