Summary
-
Though U.S. businesses have just gone through the longest and most painful recession in terms of economic profits since 1960, the rebound observed to date is far stronger than those witnessed in the two previous downturns.
-
The turnaround can be explained by unprecedented production cost control. In this regard, businesses reduced their workforce more than they did production.
-
As a result, profit margins have never increased so much in the midst of a recession since 1970. What’s more, margin levels are at a record high for a period of economic recovery.
-
So what can we expect from earnings growth in 2010? First, a caveat is in order. The historical relationship between economic growth and earnings growth hides the fact that the relationship changes over the economic cycle. For a given GDP growth rate, earnings grow much faster early in the cycle than late.
-
Assuming relatively stable margins in 2010, which would be a first during a period of recovery since 1960, we would project earnings growth in line with the consensus estimate of 13%. However, there is nothing exceptional about this rise since this results in an overall two year growth approximately to the average rebound since 1960. This despite the fact that the earnings decline during this recession was much more pronounced.
