2019 Is 5th Consecutive Year With No Operating Profit Growth

Submitted by Joe Carson, former Chief Economist & Director of Global Economic Research for Alliance Bernstein

2019 operating profits will show no growth for the 5th consecutive year. That would mark the longest stretch of no earnings growth since the late 1990s. Prospects for 2020-profit growth look slim as well given consensus GDP growth estimates of around 2%, slow global growth and rising costs pressure from labor.

Operating Profits

Q4 GDP and the full year 2019 operating profit numbers will not be released until March, but one can derive an early estimate based on available data.

For example, operating profits plus personal income are the counterpart on the income side to Nominal GDP. To be sure, the two sources of income consistently sum to total that almost matches Nominal GDP, with a residual of no more than 3% to 4% in recent years.

In Q4, published data on personal income data and GDP Now growth estimates from the Federal Reserve Banks provide enough information (two of the three key data points) to guesstimate a figure on operating profits.

Based on the available information, Q4 operating profits are estimated be $2,100 billion, up about 1% when measured against the Q3 2019 reported number of $2,078 billion and a bit less than 1% against the Q4 2018 profit figure of $2,086 billion.

Assuming the Q4 operating profits is close to the mark overall 2019 operating profits would come in at $2,065 billion, a little below the $2,075 level for 2018, and well below the cycle high 2014 profit figure of $2,120.

To be fair, these estimates are based on an early set of data, and a little more GDP growth or a small change in the personal income+profit-ratio to GDP could swing the final numbers Q4 profits higher or lower. It would take an additional $40 billion in Q4 profits—above the $2,100 billion estimate– for the calendar 2019 profits to match the level of 2018. That’s well within the potential range of estimates. However, it would take $300 billion more in Q4 profits for the calendar 2019 profits to match the 2014 profit level— that is far beyond the range of possible outcomes.

In the final analysis, 2019 will mark the 5th consecutive year that overall operating profits will show no growth from the prior year. Also, profit growth estimates for 2020—mid-single digits– look to be too high for the simple reason operating profit margins (already off 400-500 basis points from their highs) are being squeezed by rising labor costs and during the later stages of a business cycle operating profits tend to grow less than Nominal GDP.