In 2014-15, both sales growth and employment grew ever so slightly higher than the previous year-to-year comparison but for the first time in a number of years, pretax income growth declined—and significantly enough to cause a collective 1.5-point pretax margin decline. Companies had done a great job maintaining margins and leveraging profitability since the economic crisis hit in 2008. With profits slowing down reducing what can be added to equity and companies increasing their debt load to fund future growth, collective debt-to-equity ratios deteriorated significantly.
The good news here is that our collective pool of 92 companies is continuing to invest in R&D at about the same growth rate as last year, and as a matter of fact, at a higher rate than any other indicator. In addition, the hope is that companies use the increase in debt for productive reasons such as increasing investment.
The Top 50 list is based on a formula using public financial data from a "pool" of the 92 public companies, with bonus points awarded using the results of our annual Electronic Design Reader Profile Study. Check out the full methodology here.
What’s In Store?
According to Census Bureau Data for durable goods, business spending should grow by 4% this year vs. 5% in 2014, even though May and April showed about a 1.5% decrease in durable goods orders. Most of the weakness had to do with low demand for commercial aircraft, although that seems to be improving with Boeing now maintaining a significant order backlog. Orders for core capital goods increased by 0.4% in May after decreasing in April, which is a good sign for later in the year, as it relates to increased company spending on equipment and software.
Since its peak in 2008, real non-residential investment is up 8% and up by 35% since its low point in 2009. While investment fell in the first quarter of 2015, if you exclude the oil industry, it actually grew at a 1% annual rate.
Joblessness has fallen consistently since 2010. U.S. labor markets are tightening with reported unemployment predicted to fall to 5.1% by year-end, according to Department of Labor employment data. This means stronger income growth and higher spending by consumers. Good job growth of 223,000 in June (mainly in health care, retail, foodservice, and business services) keeps boding well for future growth. Hourly pay rose at an annual rate of 3.3% in the first quarter.
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The number of workers leaving jobs has increased as a result of more workers quitting. Stronger hiring data suggests these workers are moving on to better jobs.
Sales of new vehicles have held up well, and automobile makers are either maintaining or increasing capacity and modernizing plants. Census Bureau construction activity data also points to the housing sector rebounding, meaning increased demand for a range of industrial manufactured goods.
Department of Commerce GDP data suggest a 3.5% to 4% growth rate in the second half of 2015, resulting in a 2.5% annual growth rate. This was the same pattern that occurred last year, with weather being a major factor. First-quarter 2015 GDP showed a 0.7% decline. Since economic growth began once again in 2010, it has never beaten a 2.5% annual growth rate. It’s a problem that spans beyond the United States, with Brazil and Russia facing deep recessions and China slowing down.
Department of Energy price statistics show that prices at the pump appear to be holding steady and are about 90 cents less than last year. Crude-oil prices are also holding steady and are predicted to stay in the $60-$65 per-barrel range. Although more electric utilities are burning natural gas rather than coal, there appears to be plenty of supply to meet demand.
Long-term interest rates should stay fairly stable as long as inflation stays under control, given improved U.S. and European economic growth. While the Fed is expected to raise short-term rates by a quarter point in September, a further increase will be slow to come as the Fed is aware of the dangers of raising rates too quickly, especially before increases in wages gain enough momentum.
U.S. consumer debt has declined as the ratio of mortgage debt to GDP has fallen below 80%, back to its 2002 level, according to Societe Generale. Total household debt is at 107% of disposable income, the lowest amount since at least 1980. Household net worth is at a record high in real terms and close to the pre-crisis peak as a share of GDP.
Credit markets are strong as companies have issued $609 billion in debt so far in 2015, up by $40 billion from a year ago, according to Dealogic. Bank business lending is up by 12% as of April 2015, according to the Fed. While our company pool debt-to-equity ratio showed a significant deterioration, we expect that some of this debt will be used to fund new plants and equipment and software.
In summary, 2015 appears to be somewhat similar to 2014, but there is good news here. It also just seems to “feel” better than 2014. The key to continuing improvement will be for the Fed to keep interest rates low. This will continue to help households in the hardest-hit regions and ensure that the wage increases we are seeing contribute to higher spending.
There are also some exciting new technologies such as 3D NAND, FinFET, and the drive to single-digit nanometer nodes, and their continuing impact on making us more mobile and interconnected.
Following is a closer look at the top three companies in our 2015 report.