Page 79 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

the United States, respected economists favor bank national-
ization in order to prevent the collapse of the banking system.
This change in mind-set—reinforced by domestic political
considerations—could lead to the kind of government inter-
vention and regulation, as well as higher taxes, described ear-
lier in this chapter.

■ A TURN IN THE PROFIT CYCLE ■

During the long years of high growth, companies became
accustomed to reporting rapidly improving quarterly earnings.
As research from BCG shows, most industries earned record-
high profits in the years leading up to the crisis, resulting in the
buildup of cash positions, increased payouts and buybacks, and
intensified merger and acquisition activity. In the United States,
for example, corporate profits reached a record-high share of 13
percent of GDP (compared with 7 percent in the early 1980s).
The rising share and profitability of the financial sector con-
tributed to these profit levels, as did high global growth rates,
easy access to cheap labor, the deregulation of markets and
industries, and lower tax rates. But these years will be remem-
bered as halcyon days because there will be no return to the
profit levels of 2005–2007 anytime soon.

Profits under Pressure

When the financial crisis first struck, many companies sur-
prised the markets by beating analysts’ expectations for profits.
They did so by aggressively cutting costs, even as they showed
disappointing sales figures. Going forward, these companies
will struggle to grow profits in the era of low growth. Some 68

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