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Margin normalisation is even excellent news for the US economy

The US labour market racked up a sixth consecutive year of solid performance in 2016. The world's number-one economy has created an average of 2.4 million jobs per year since 2010 (2.2 million in 2016), primarily in health care, education, and business services. Unemployment has fallen to its lowest point since August 2007 (4.7% in December). However, these very positive numbers must be stacked up against the historically low participation rate, which is stuck around 63%, and the very high proportion of jobs created in low-wage industries. Another negative: wage inflation for all sectors of the US economy has remained contained, despite the significant decline in the jobless rate. A turning point could come in 2017, with new tensions over wages. The latest jobs report argues for it: in December, the average hourly wage was up by 2.9%, its biggest jump since June 2009. This new trend (if it is one) is not bad news for Corporate bond investors, nor more generally for the American economy.

  • Obviously, US corporate margins will be penalised by the rise in wages. They are currently at historic highs, due to the corporations' very active policy of cutting production costs by capping wages. Net profit margins are currently close to 8%, which is close to their cyclical and secular record. We expect corporate margins to normalise in 2017.
  • Margin normalisation is not necessarily bad for the profit growth of American corporations. It's extremely important to understand that the growth in profits seen during this cycle has been driven more by margin growth than growth in sales. In other words, pressure on wages has enabled corporations to increase their profits. On a macroe-conomic level, the trend has resulted in very strong growth in GDP from corporate profits at the expense of labour (see graph). Raising wages would give companies more openings and – all other things being equal – increase revenue momentum.
  • The rebalancing of profits and wages is excellent news for the US economy. Increasingly robust demand is indispensable to promoting the investment recovery. Investment has not yet returned to 2008 levels. Monetary policies have been powerless to stem this. Extremely accommodating financing terms have allowed US companies to increase their debt, but the majority has gone toward share buybacks and acquisitions. Investment spending has remained very limited. This is specifically due to the flat de-mand environment.

A rise in wages is not necessarily bad news for American businesses, and is even excellent news for the US economy. A rebalancing of profits in favour of wages is needed to stimulate investment and increase the growth potential of the world's number-one economy.





AINOUZ Valentine , CFA, Credit Strategy
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Margin normalisation is even excellent news for the US economy
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