Monday, January 7, 2013

Good Chart on Profit Margin Reversion

U.S. corporate profit margins are, in aggregate, wide now, and at risk of reverting to the mean.

The second chart in this piece by John Hussman, who is a money manager and a former professor of economics at Michigan, is interesting as evidence of this.

(I have blogged about this topic before, here.)

Whether the problem is pervasive across the economy, or isolated within particular industries, is hard to know. If the cause is a weak bargaining position for employees because unionization has declined, or because foreign competition has increased, then the widening of profit margins is probably fairly pervasive across income statements in nearly all industries. If, however, the cause is weaker antitrust enforcement, then the wider margins may be limited to industries in which concentration has increased over the past two or three decades. And a third possibility is that if Andrew Smithers is correct in his argument (discussed at second link above) that the widening is caused by the bonus culture run amok, then the effect may be mostly in companies that have incentive-heavy management compensation cultures.

It may be a mix of these. Anyway, the fact that capital is getting a bigger piece of the pie than it used to is much clearer than the "why."