U.S. Profit-Margin Outlook `Extremely Bad': Chart of the Day

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

As the CHART OF THE DAY shows, profit before interest, taxes and depreciation -- accounting adjustments for wear and tear on buildings and equipment -- amounted to 36.4 percent of U.S. corporate output in the first quarter. The calculation was based on data compiled by the Commerce Department.

The percentage was the highest since the department’s quarterly data started in 1947, as the chart depicts. Smithers, whose firm counsels more than 100 clients on international asset allocation, included a similar illustration in a June 18 report.

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.

The decline in margins will lead to profits falling “well short of expectations,” he wrote. Analysts foresee earnings at companies in the Standard & Poor’s 500 Index rising 34 percent this year and 18 percent next year, according to data compiled by Bloomberg.

(To save a copy of the chart, click here.)

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

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