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Saturday, November 26, 2005

Unprecedented Corporate Profits

According to the LA Times, S&P 500 companies posted a 14th straight quarter of double-digit gains in earnings:
With nearly all of the companies in the blue-chip Standard & Poor's 500 index now having reported their earnings for the quarter ended Sept. 30, the overall growth rate was 11.5% from a year earlier, S&P said this week.

That marked the 14th straight quarter of double-digit gains, an unprecedented streak, said Howard Silverblatt, who compiles S&P's earnings data. [...]

Companies have reaped record earnings in the economic expansion since 2002 as sales have risen while managements have focused intently on keeping costs down, including by limiting hiring.

"What companies have done is they've been able to squeeze costs [and] they have great productivity," Silverblatt said.

Although the year-over-year growth rate in earnings has declined from 31% in the second quarter of 2004, the surprise is that results still are rising at a double-digit pace, many experts say. The growth rate was 13.4% in the first quarter of this year and 14.4% in the second quarter, even as rising interest rates and soaring energy prices added to many companies' costs.
How unprecedented is this streak of 14 quarters of double digit earnings growth? According to this article, it's the "longest run of double-digit quarterly profit rises since at least 1936" and that this streak "eclipses the previous 13-quarter run of double-digit earnings growth, when US companies emerged from the early 1990s downturn to mark the best such showing for seven decades." Furthermore, "Wall Street institutions are also betting on the double-digit increases in earnings per share continuing for at least a further two quarters, into next year." So not only is this already the best earnings streak for decades, the streak is set to continue for at least a couple more quarters.

This is good news not only for the rich, but also for the less well off. Wages and profits are always linked over the long run. When doing business becomes more profitable, companies seek to expand their business. This increases the demand for labor which reduces the labor pool causing wages to increase. Because of these earnings increases, I expect to see the median family income increase nicely during 2006 and 2007, especially if unemployment drops a notch or two further.

I think the U.S. economy has responded wonderfully to the Bush tax cuts and everybody will start to feel the positive impact soon.

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