Profit Margins: A Pleasant Surprise Could Be In Store

If the recovery picks up some steam, profit margins could widen appreciably, says economist Susan Lakatos of Kidder, Peabody & Co. Lakatos points out that service-sector productivity last quarter posted its first year-over-year gain since 1988. As a result of this development, which reflects employment cutbacks that began late last year, unit labor costs in the nonmanufacturing sector, compared with their year-earlier level, were up less than service prices for the first time since 1989. So, profit margins in service industries actually widened slightly.

Meanwhile, notes Lakatos, manufacturers are sitting in the catbird seat. Having slashed payrolls for two years, they managed to keep increases in unit labor costs below their price hikes throughout the past recession--the first recession ever in which manufacturing profit margins didn't get squeezed.

That record, says Lakatos, "implies that manufacturers have an unprecedented opportunity to benefit from volume gains as the recovery accelerates." And signs that the service sector may finally be getting its own labor-cost problems under control suggest that its profits could get a nice boost, as well.

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