Profits are at the root of the disagreement between Federal Reserve chairman Alan Greenspan and successor Ben S. Bernanke over where the economy is headed, according to Bloomberg News.
Greenspan sees peaking corporate profit margins as a sign the expansion may be ending and recession risks growing. Bernanke sees them as an indication wages may be ready to catch up with corporate profits.
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“We are in the sixth year of a recovery; imbalances can emerge,” Greenspan said in an interview last Monday. Analysts surveyed by Bloomberg predict per-share earnings growth among S&P 500 companies will slow to 6.7 percent this year from last year’s 16.7 percent.
Bernanke, rather than seeing peaking profit margins as a precursor of tough times, considers it “normal” that inflation-adjusted wages catch up with profits, especially when productivity has been strong. He told lawmakers Feb. 15 that, because profit margins are “high by historical standards,” companies may even absorb the extra costs without raising prices.
History seems to side with Bernanke. In the last expansion, margins began falling in the fourth quarter of 1997; there was no recession until March 2001.
