The national income & product accounts provide an important supplement to S&P 500 earnings. The second estimate of Q1 GDP contained a preliminary reading for corporate profits for the same quarter and confirmed that US companies are suffering a margin squeeze.
It is worth reflecting on the causes of this drop in margins. Surprisingly, at this stage of the cycle, unit labour costs remain subdued, and are still 0.5% below the peak of Q1 2017.
Rather, higher costs associated with the consumption of fixed capital have been the main contributor to total unit costs over the past year.
R&D and software both have higher rates of depreciation than most other capital assets. It is ironic: the investments that are making US companies more productive are also crimping profit margins – on the national accounts measure.
At face value, the drop in corporate profits would be negative for the stock market. Nevertheless, a decline in profit margins driven by higher depreciation costs may not be an issue for the economic cycle if it reflects strong investment in intangible assets.
