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Raghuram Rajan Sees High US Margins Continuing

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Corporate profit margins in the United States are likely to remain at elevated levels for the foreseeable future, despite concerns about an economic slowdown, former IMF chief economist Raghuram Rajan said on Wednesday. His comments at a financial conference in Singapore were in contrast to several US equity strategists, who said at the Reuters 2011 Investment Outlook Summit last week that optimism about robust profits may be waning. "The bottom line is that the underlying private sector economy in the United States is extremely profitable at this point and is looking to grow," Rajan said. "For the first time, I have heard my private sector businessmen friends talk about investing in the United States, especially in manufacturing." The US strategists had said their forecasts were below Wall Street consensus estimates, saying corporations may be feeling the effects of unexpected headwinds, including the disaster in Japan. "History suggests that about one year after the ISM peaks, margins peak," said Goldman Sachs Chief US Equity Strategist David Kostin. The Institute for Supply Management's closely watched manufacturing index peaked in February, at 61.4, and is now just holding in expansion mode, above 50. It was 53.5 for May. Kostin said S&P 500 earnings per share are poised to climb back this year above the previous peak of $91 from 2007, rising to $96 in 2011 from $84 in 2010, and increasing another 8 percent to $104 in 2012. The Thomson Reuters consensus forecast for 2011 earnings per share for the index is $100.07, and for 2012 it is $113.43. Rajan said he did not margins easing in the near future. "It's reasonable to accept some sort of narrowing of those margins over time but I don't see the mean (average) revision happening as quickly," he said. The former IMF chief economist, who is a professor at the University of Chicago's Booth School of Business and also economic adviser to the Indian prime minister, said high margins usually attracted new entries or higher input costs, but neither seemed to be happening. "I don't see either of those really big right now in the United States," Rajan said. "Especially at the small and medium business level, they are still struggling for capital, and so it's hard to see a huge amount of new entry. "As far as the input costs being bid up, it seems to be that apart from commodity prices, labour costs are still relatively contained although that depends on whether it's skilled labour or not." (Reuters)