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A Closer Look: The U.S. Economy – Corporate Finance and Capex – a Tale of Two KPIs
by Jenna Allen, ITR Economics
What you need to know: Corporate profits and cash levels are likely to be squeezed this cycle. Firms will need to take extra care to mitigate the risk of profitless prosperity.
To assess corporate financial health, we need to take a deeper dive into the current state of two key performance indicators: corporate profits and corporate cash levels. Both US Domestic Corporate Profits and US Domestic Corporate Cash levels are elevated relative to historical levels; however, while profits have continued to rise following pandemic spikes, cash levels have declined modestly. Profit levels are still a relevant and solid indicator of today’s relatively stable business landscape, but cash flow is key, and corporate cash levels may be especially important in an environment where borrowing is still relatively expensive. The tick down in corporate cash levels tells us that firms are likely to be judicious making capital investments. While corporate cash can drop from capex spending, muted B2B spending data as of late suggests that this is generally not the case.
In the chart above, we have adjusted corporate profits and corporate cash levels for inflation, specifically inflation related to capital expenditures (US Final Demand Private Capital Equipment Producer Prices). Trends in inflation-adjusted corporate profits are signaling modest rise for B2B spending ahead, but inflation-adjusted corporate cash levels suggest slightly more trouble afoot. While we still anticipate general but mild macroeconomic rise ahead, businesses are more likely to take a hit to their bottom line. Inflationary pressures are expected to generally rise in the coming years amid factors including demographic-driven rise in labor costs, rising electricity costs amid the boom in AI, and increasing economic nationalism. Read more
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