Something is happening in the corporate world that has not taken place in this generation.
Hitherto we have been accustomed to believe that corporations’ profits would grow “forever,” barring the usual business contractions that take place from time to time. Excessive pay is presumed on that premise and, therefore, earnings per share will parallel that.
Lenders assume that as a matter of course that will mean that borrowing will be repaid. This is ingrained in the financial community. All are believers.
That explains why the business community is upset over recent data indicating that for some time now sales and profits have failed to advance this despite business conditions looking pretty good. Sales and profits show almost no growth.
Blame is centred on the weak commodity prices and the strong U.S. dollar, which means foreign earnings, when translated back into U.S. currency, are weak. Earnings of traditional firms have been disappointing as have those in the high-tech industries.
Companies report that sluggish trends in Europe and Asia now are prevalent.
It should come as no surprise then that companies are considering overall deflation as the cause.
Over the past two decades companies had been reporting gains far above the past decades’ average, so slowing down was to be expected.
To counteract these disappointing trends companies have expanded abroad, where prospects are brighter. New tactics have been tried. Another tactic of business was to push down the share of profits handed out as wages.
Nowadays, however, for the first time in years, wage rates are starting to climb. In any event, in the long run weak wage growth means that customers will be hard to come by with the resources needed to stimulate sales.
The other approach was to begin share buybacks that make earning appear to be growing.
Fewer shares outstanding mean that profits appear favourable. Hence shrinking profits are obscured by this tactic.
Too, that weakens corporation balance sheets.
How many companies will summon the strength to erase these negative trends?