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Not a Starbucks Issue

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In a Wall Street Journal front page report, Starbucks CEO Howard Schultz hit the nail on the head regarding corporate profits.

Coffee chain Starbucks last week warned that customer traffic in U.S. cafes began slowing in June. The softness continued in July, so the company cut its earnings guidance for the third quarter.

“This is not a Starbucks issue,” said Howard Schultz, chief executive. “This is a macro problem of weak consumer confidence.”

Corporate profits as a percent of GDP have been at unsustainable levels. You can see on my chart below that profits peaked out in the fourth quarter of 2011 at 9.8% of GDP, and are now headed back toward trend. That number has dipped to 8.9% of GDP, even while GDP growth has dropped to 1.5% in the most recent report.

There are few places left for already lean corporations to cut costs. Any increase in profits from here on out will have to come as a result of increasing sales, something that looks increasingly less likely given the turmoil in Europe, slowing Asian demand and the lackluster consumer confidence mentioned by Schultz.

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.