Healthy corporate profits and cash flow along with strong economic indicators will provide a sturdy foundation to the ongoing U.S. economic recovery, according to an analysis released by The Conference Board.

Corporate profits are rising at a 30 percent annual rate due to huge gains in domestic corporate profitability and strong economic growth and a low dollar that are boosting business receipts from the rest of the world.

“Corporate profits have strengthened not just because of productivity and cost cutting, but because corporate revenue is now growing almost 7 percent annually, which is faster than gross domestic product,” said Gail D. Fosler, EVP and chief economist of The Conference Board. “It is projected to grow at this rate or faster over the next 18 months.”

A shift in profits from the financial sector to nonfinancial corporate business is under way. Activity in financial services has risen very gradually over the past decade, but profitability surged at the end of the 1990s as interest rates declined. Now with the economy expanding, the nonfinancial business sector is driving profitability. Financial services profits have dropped as a share of total profits in 2002-2003, because margins are squeezed by very low interest rates, weak loan demand, and a declining demand for many higher-margin investment banking and risk management products, The Conference Board said in a statement.

The financial services sector was able to grow profits faster than revenues because of declining interest rates, favorable market conditions that fostered an appetite for risk, and technological innovations that enabled them to shift the mix of activity to highly profitable off-balance-sheet transactions. But other sectors, like construction and leisure and hospitality, have been able to grow gross margins very rapidly.


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