In light of the slower trend rate of GDP growth, one of the economy’s more surprising features over the last two decades has been the level of corporate profit margins, which have been structurally higher than at any time in the post-war period. In our January 11 Economics Weekly we discussed some of the near-term cyclical pressures on corporate profit margins that are likely to weigh on margins in the coming year, including: higher interest rates and tighter financial conditions, slower global GDP growth, some upward pressure on wage costs, moderate pricing power, and the trade dispute amongst other geopolitical uncertainties. In this week’s Economics Weekly, we take a slightly bigger picture approach and delve into why margins have been structurally higher and what might make them revert to their historical mean.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.