Strong Economy Spurs More Selling, Spending
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This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Anne-Marie Fertoli in New York. A strong economy is encouraging S&P 500 firms to sell and spend more. But profits aren't rising as quickly in the fourth quarter as they were earlier this year. Wall Street Journal reporter Teo Francis joins us now to talk about why growth is slowing. Teo, let's start by talking about the strength of the economy and how that's led companies to sell more this year.
A big factor is that the whole world at this point, or most of the world, seems to be kind of on the same page.
How is the global economic recovery driving higher S&P 500 sales?
Europe is finally doing better. For much of the last few years, Europe has been struggling with growth, but now they seem to be on track. The U.S. consumer is still going pretty strong, and so U.S. economic growth is still pretty good. And you have much of the world really eager to buy more. And, of course, that's ultimately what drives corporate sales.
Any other specific economic conditions that are allowing this to happen?
Another factor is that you're seeing more in the way of business spending. And that's always a big question mark and has been a big question mark for the last few years is just how much businesses are willing to invest and reinvest in the business. Of course, if it looks like growth is going to be slow or non-existent, businesses are much less willing to commit profits and revenues to expanding. When things look better, they're much more willing to. So it's a little bit of a virtuous cycle there. And you're starting to see more of that.
And as you mentioned in your story for The Wall Street Journal, the convergence of these economic factors that you just mentioned is pretty rare, or at least hasn't been seen much in the past five years, right?
That's right. The last few years have really seen sluggish growth. I think even though it's been an expansion since the Great Recession and one of the longer expansions in history, in recent history, it hasn't been really robust or vibrant expansion. So There's some hope that that will pick up, and there certainly seem to be some signs that we're there.
So now let's talk about the flip side. As we approach the end of the year, you spoke to a portfolio manager who I imagine expresses the concerns of many when he says profit margins, he believes, may be on their way to topping out. Why is that?
Well, so paradoxically, even as you're getting this increase in sales, which is really a faster rate of growth for sales than we've seen in a number of years, some of the same factors are increasing costs for companies. So you're starting to see some increase in labor costs, which may not be as big a deal for companies as it might be, but it's still increasing what they have to spend to generate those profits. We are also seeing energy prices go up. You're at about $60 a barrel on the global market for oil, a little lower in the U.S. because inventories seem to be high. But nonetheless, that's higher energy costs than we have been seeing or than we were seeing not too long ago. Similarly, a lot of commodity prices
are really on the rise. You know, when companies really start getting going, when the economy starts growing, there's more demand for a lot of this, for energy, for commodities, for labor. And as we all know, in sort of Econ 101, demand goes up, the cost tends to go up as well. So companies are facing these higher costs at the same time that they're seeing higher demand.
We'll talk more about profits for large companies in just a moment. I'm speaking with The Wall Street Journal's Tao Francis, and you're listening to Your Money Matters from The Wall Street Journal. Thanks for listening, everybody. So, Tao, what are the current predictions as to just how far profits for large companies are going to continue to rise in the final months of this year?
Certainly, analysts and investors seem to be expecting continued growth. The fact that profit margins may not be growing as dramatically going forward does not mean that companies will suddenly start losing money or will start making less money.
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