Lower inflation and rising wages put pressure on profitsOne of the key changes in our recent forecasts for slower growth is an update on the inflation outlook. Inflation looks set to be weaker than previously expected and this has fed into a more accommodative monetary policy stance from central banks.
US profits set to fall in 2020
We take a top-down approach to forecast the share of profits in GDP via profit margins and capacity utilisation. Capacity utilisation measures the extent to which businesses are using their capacity to produce goods or services. Our forecast for this is driven by GDP growth, while the forecast for profit margins is also affected by growth in labour costs, prices and productivity. We do not expect a US recession (i.e. two consecutive quarters of negative economic growth) but our forecasting model suggests caution on US earnings would be appropriate. We expect profits to peak in Q3 2019 and to decline in line with a weaker US economy thereafter. Overall, we forecast US profits (excluding financials) to rise by 6 per cent in 2019 but to fall by 4 per cent in 2020. This is because below-trend economic growth means lower capacity utilisation, putting downward pressure on profits. Moreover, profit margins will be squeezed as labour costs rise, while inflation and productivity decline on the back of weaker growth. Read more: