The answer to that question will vary considerably, depending first on your industry and then on how things are going for your company. Given the shift in the business cycle, we may need to make some different decisions in terms of our revenue and cost structures, impacting our bottom line and our free cash flow. We also need to recognize the pressure of the economy on our businesses.
Corporate Profits for US Domestic Financial Industry, with inventory and capital consumption adjustments (see the note below)*, ended 2018 below the 2017 level. The quarterly year-over-year comparison (3/12 rate-of-change) is in Phase D at -5.3%. (Phase D means that the profit dollars for the quarter are declining below year-ago levels.) The Profits 3MMA has dropped to $426.4 billion, the lowest level in 30 months. Readers in this industry whose profits are above the year-ago level should feel quite good about themselves.
Corporate Profits for US Domestic Nonfinancial Industry, with inventory and capital consumption adjustments, ended 2018 at a record-high $1.399 trillion on a 3MMA basis, which is 14.9% higher than the year-ago level. The 3/12 is descending off a September 2018 six-year high, indicating that the rate of growth in profits is slowing.
The table below shows that not all sectors within the Nonfinancial Industry are enjoying profit growth. These profit figures have not been adjusted for capital consumption.
|
|
3/12 (%) |
Phase |
3MMA (billions of $) |
|
|
Retail |
11.5 |
B |
$155.2 |
Slightly steeper-than-normal fourth-quarter decline |
|
Wholesale Trade |
48.2 |
B |
$127.9 |
Rising off a June 2018 low |
|
Manufacturing |
20.8 |
B |
$319.4 |
Rising off a March 2018 eight-year low |
|
Food/Beverage/Tobacco |
-18.3 |
D |
$45.1 |
Declining and at a four-and-a-half-year low point |
|
Computer and Electronic Products |
-12.3 |
D |
$39.3 |
Steepest fourth-quarter decline since 2006 |
Most Industry participants are no doubt feeling very positive about where profits have been and perhaps anticipate similar profits for 2019. Our macroeconomic outlook for 2019 suggests that the rate of growth in many segments of the nonfinancial side of the economy will slow noticeably, and that could make it challenging to keep profitability at 2018 levels. Revenue growth will likely slow for most readers. Our Challenges and Changes June 2019 webinar will cover this in detail.
With a record-high $2.0 trillion in the bank, corporations are flush with cash, but the rate of growth is slowing. The 12/12 is at 9.0% but in Phase C, while the 3/12 is at a lesser 4.6%, the lowest 3/12 value in 25 months. The input from this ITR Checking PointTM is clear: Expect the rate of rise in corporate cash coffers to slow further. This is a good time to exercise caution with your own cash projections for 2019.
While the rate of growth in cash is slowing, the rate of commercial-industrial borrowing is accelerating. The total amount borrowed, $2.238 trillion, is slightly above the cash balance. The 12/12 is at 6.6%, and the 3/12 is at 9.9%. This ITR Checking Point is signaling increased levels of debt as we move through the near term. So far, the delinquency rate is below the year-ago level with a 12/12 of -22.5%, but the rates-of-change are rising. It will take time before delinquency becomes a problem, but we may be looking at an early indication of our forecasted 2022 recession.
Keeping a close eye on costs while having a realistic view of revenue growth in 2019 will keep your bottom line healthy. Avoid those unnecessary expenditures that often come with record profits. Instead, allocate the time and money to add technology you will need to manage costs and compete effectively in the years to come.
Alan Beaulieu
President
*Total corporate profits for domestic financial industries in the United States with inventory valuation and capital consumption adjustments. This measure–profits from current production–is the income that arises from current production, measured before income taxes, of organizations treated as corporations in the national income and product accounts (NIPAS). With several differences, this income is measured as receipts less expenses as defined in Federal tax law. Among these differences are: Receipts exclude capital gains and dividends received; expenses exclude bad debt, depletion, and capital losses; inventory withdrawals are valued at current cost; and depreciation is on a consistent accounting basis and valued at current replacement cost. Domestic corporate profits are earned by firms in the US, but do not include profits that US owners earned abroad or profits repatriated to foreign owners. The capital consumption adjustment is the difference between depreciation used in determining profits before tax and depreciation on the basis of consistent accounting and valued at current cost. Source: US Bureau of Economic Analysis. Measured in billions of dollars, seasonally adjusted at annual rates (SAAR).