Economics: Why Are Profit Margins Climbing To Records In A Sluggish Economy?

  (Drivebycuriosity) - Recession or not, US companies are doing well and their profit margins climbed to record highs. "US Corporate Profits Soar With Margins at Widest Since 1950" reports bloomberg. Profit margins are the profits in percentage of the revenues, an indicator how efficient a company works (wikipedia ). How can profit margins climb to records in a sluggish economy, which might be even in recession?

 

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I think there are at least 3 reasons for that:

Corporations are getting more and more efficient &  productive over time - thanks to a continuous learning progress. Companies are learning organisms because they are managed by humans who are continuously improving themselves and their companies.

In the recent recessions they were forced to squeeze out costs to raise efficiency & productivity. Especially during the recession 2008 companies had restructured and reduced costs significantly in order to survive. Now they are more fit & more efficient than before.

Company earnings are also boosted because automation leads to continuously falling costs.  Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with the same amount of employees. More and better machines (robots) are doing the work of people which translates into lower costs, higher profit margins and climbing earnings.

It seems that this process is accelerating again and we are at the begin of a new industrial revolution. We are experiencing a rapid advance of information technology, meaning combinations of computers, smartphones and other digital systems via the Internet. Software - which is increasingly Internet connected and uses more and more the cloud (access to huge external data centers) - organizes the whole business: Creating new products, inducing machines to run more efficient, finding cheap suppliers, managing customer relations and so on. Car producers and many other manufacturers are increasingly using robots and similar machines to reduce their costs. Companies are also beginning to use 3D-printers to become more cost efficient and flexible. 

The digitization of the economy is supported by the advance of machine learning, also known as Artificial Intelligence. AI helps to organize production & logistics, making them cheaper and more efficient, thanks to the enormous speed and calculation power of new generations of chips.

The Covid-19 pandemic accelerated the fundamental trends that have been shaping economy & society in the recent decade. The rise of the Internet gained even more speed and turned into a great leap. Covid-19 reduced the resistance against technological progress (faz.net ). The rapid digitization is raising efficiency & productivity, driving company earnings.

I believe that the learning process will continue and will translate into a long term trend of fast rising company profits, the engine of the stock market.

Enjoy!