Government Spending Pads Profits…For Now

U.S. Corporations will be looking to save money wherever they can in the coming years. For all we hear about companies struggling to get back on their feet, they’re actually enjoying record high profit margins right now.

But that’s all about to change. Years of data show that profit margins are mean-reverting. So while U.S. Corporations’ margins are now 10%, they’ll soon snap back toward the long-term average of about 6%.

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James Montier of the investment management firm, GMO, explains the driving force behind record high margins is: government spending.

Government savings creates a drag on profit margins, typically keeping them under 8%. But recently the government has been spending with wild abandon. So that has the opposite effect on margins – it props them up. As government deficit spending expands, so do corporate profit margins.

But we all know, sooner than later, government will have to tighten the reins and reduce deficit spending. That will squeeze profit margins, pushing them back toward 6% over time.

As this trend unfolds, watch for companies to cut costs anywhere they can. After all, a penny saved is a penny earned. 

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Categories: Economy

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.