If aggregate demand is so low, why are profits so high?
SmartFlix [TJIC's company] has show paper losses every year it's been in existence "¦ but I expect that this year it will show it's first ever paper profit.
"¦which is not a sign of macroeconomic health, but is, in fact, a sign of my very poor expectations for the economy.
Ditto here. We will probably show our largest paper profit this year, but it is mainly because we have cut way back on investment in new projects. And this has nothing to do with demand - we are experiencing a boom, as the recession pushes Americans towards lower cost recreation of the type we operate, at the same time it cuts state budgets and makes them more amenable to our business model of private operation of public parks.
So why are we cutting back investment? I run a very low margin service business. Here is a simplified calculation: We make, say, 8% of revenues before taxes and accelerated depreciation. 50% of our costs are labor, and the new health care law may raise our labor costs by 8% or even more. A four percentage point cut in margins is not a big deal to Microsoft, but it is to us. Until we figure out how this all will play out, we are still investing but only in above-average opportunities.
When we invest in a new project, it hits that year's income in two ways. First, we have accelerated depreciation on the new capital equipment. And second, we typically have a startup loss in the first year. In the last few years of rapid growth, we have had close to zero paper earnings because of these growth effects. Once we take our foot off the pedal this year, though, we will show a large positive income. For us, reduced growth and investment = higher short term reported profits.