Profit margin under pressure?
Over the past two days, Federal Reserve (Fed) Chairman Jerome Powell has been explaining the current monetary policy to the US Congressional Finance Committees. Possible adjustments to the policy may be the result of the outcome of the Beige Book. The report is published eight times a year and reflects the financial and economic situation in the United States.
Last Wednesday, the Fed published the Beige Book for the period from late May to early July. The general conclusion was that the US economy shows moderate to robust growth. At the sector level, there is above-average growth in manufacturing, non-financial services, transport and the travel sector. Investors are currently watching developments in the areas of employment, wages and prices with more than their usual interest.
Employment and wages
There was healthy demand for labour in all 12 districts, with strong demand for the low-skilled standing out. Three of the 12 districts experienced strong employment growth. The rapid pick-up in economic growth in some districts is creating problems in the supply side of the economy. Disruptions are caused by shortages of materials and labour. As a result, the stocks of many consumer goods have fallen and there are delays in the delivery of these goods. The resulting labour shortages caused above-average wage growth, especially in low-skilled jobs.
The sharp increase in consumer spending enabled many producers to raise prices. In seven districts, prices rose sharply. Producers that are unable to raise prices are faced with a profit squeeze as a result of increased production costs. It is, therefore, to be expected that prices will increase further in the coming months.
The number of new applications for unemployment benefits in the United States decreased by 26,000 to 360,000 last week. This is the lowest number of new applications since the outbreak of the coronapandemic. Jerome Powell told the Senate yesterday that although the labour market is improving, there is still a long way to go. At least 7.5 million jobs still need to be created in order to return to the pre-corona level.
Despite the fact that the Beige Book indicates that prices will continue to rise in the coming months, Powell continues to emphasise that the rise in inflation will be temporary. The central bank, therefore, intends to maintain the current monetary policy for the time being.
Analysts’ expectations of corporate profitability are high. Companies have benefited from the strong economic recovery after the corona crisis. This means that profitability for the past quarter is in good shape. What interests us is the profit forecast for the next six months. To what extent will profit margins be affected by increased production costs? We will keep you informed.