As I now do each month, I am relaying some key findings from my research on corporate profits and the US economy in general. Given that we have just seen the end of 2012’s fourth-quarter profit reports, we have ample fodder to assess the state of the US corporation. The health of these corporations is one of the five areas of the US economy I analyze to find clues to its future direction. Regularly looking at these indicators has helped me create a standardized tool to measure profits and the economy. Using this tool, or scorecard, as I now like to call it, has helped me to weed out the politics and rhetoric from the basics of the business cycle. Here's a fresh look at where we are now:
- Corporate health: Corporations are still flush with cash, but cash balances are starting to fall. In the fourth quarter of 2012, earnings were solid but not exceptional. Revenues from companies in the Standard & Poor’s 500 Stock Index did better than expected in the fourth quarter — an indicator that the international marketplace may be picking up. Even so, it is notable that small-cap company earnings surged ahead, likely because these smaller businesses are more US-focused and not as exposed to international sales as their larger counterparts. Corporate balance sheets are strong but shrinking as companies buy back stock and begin to borrow from banks.
- Consumer resilience: US consumer balance sheets are strong, given that consumers’ use of credit cards and mortgage borrowing has been restrained. Consumer confidence has begun to waiver to a certain degree amid high taxes and gas prices.
- The cost of capital: Thanks to the assistance of global central banks, the real cost of borrowed capital is low and the nominal cost of bond debt is at all-time lows. Cheap capital benefits companies — we are seeing its effects in improved corporate profits — and it may help job growth as well.
- Exports and trade: We are seeing a decided move upward in global trade indices from Europe to Asia.
- Housing: The inventory of houses for sale has fallen to multiyear lows as banks have increased mortgage lending and job growth has continued. New home construction should help the economy in 2013 .
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.