>AMERICAN THEMES (GLOBAL ECONOMIC RESEARCH)

US profit cycle close to bottoming

■ Corporate profits are highly cyclical and the strongest advances occur early in an expansion following employment and other cost cuts. This is true even during sluggish recoveries. Productivity gains are the key feature behind profit gains.

■ We expect a modest recovery in the US to begin in Q3 2009. Even with moderate growth, cost reductions to date imply a 15%-20% 2H’09 annualized gain in profits as measured in the US GDP accounts.

■ Pricing power is a deterrent on profit margins. Pricing power trends pose some risk that the upcoming profit recovery falls short of the normal recovery phase. We examine the cyclical forces on margins even back to the Great Depression.

■ Profits of course have immediate market ramifications but they are also important as drivers for business investment and reversing job losses. The profit recovery in later 2009 is a necessary step toward stemming layoffs as we anticipate for 2010.

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