Profit Margins Have Likely Peaked

Tue, Oct 9, 2018 - 9:18am

Originally published at The Boock Report

The National Federation of Independent Business released its Small Business Optimism Index for September that moderated to 107.9 from 108.8, which was the record high. Higher wages continued as current compensation plans (below) rose to a record, up by five points to 37 percent. Future plans were up by three points to match the most since 1989. This was driven by Positions Not Able To Fill, which held at the highest level since 1973.


Plans To Hire did fall by three points after rising by three in August. Capital spending plans also gave back its three point rise in August. Those that Expect a Better Economy fell one point and those that Expect Higher Sales rose by three points (after dropping by a like amount last month).

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There was a one point fall in those that said it is a Good Time to Expand. I do expect an increase in inventories in the next few months for those companies that import goods from China but the inventory component here fell seven points. Expectations for Higher Selling Prices fell two points off a three-month high and earnings expectations dropped by two points.


The NFIB said "There is extraordinary competition for workers in this historically tight labor market. Small business owners are investing more in their employees to attract and keep qualified workers." The areas where workers are most needed are in construction, manufacturing, and transportation.

Bottom line:

Small business optimism is still near historic highs in response to lower taxes and regulatory relief but the lack of labor supply (shown above) is clearly showing the limits to faster economic growth. Employees are enjoying the best wage situation in this cycle while employers have to manage profit margins as interest rates are of course rising too. Low wages and interest rates were the top two main factors in the big expansion in profit margins in this cycle. We can argue then that profit margins likely have peaked.

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