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Profits at US companies soared 13.5 per cent to a record $1,268.8bn in the final three months of 2004, boosted by strong demand and productivity growth coupled with workers' weak bargaining power.
But cash flow failed to keep pace with the rapid rise in investment spending, suggesting that businesses may increasingly need to tap capital markets.
Net cash flow was down 1.1 per cent compared with a year ago at $1,283.2bn -- below non-residential investment at $1,286.3bn.
"Companies have been so awash with cash that they have not needed to turn to the capital markets so much," said Ian Morris, US economist at HSBC. "They may need to borrow more if they continue to invest at this pace."
A pick-up in bond issuance by companies, economists said, could put upward pressure on long-term interest rates. "High levels of borrowing by the US government have not appeared to push up interest rates partly because companies have not needed to borrow," said Mark Zandi, chief economist at Economy.com, the consultancy. "This ballast on long-term rates may start to lift if companies continue to spend more than their cash flow on investment."
Economists had expected a rebound in corporate profits, after results for the third quarter fell 4.8 per cent depressed by the hurricanes that swept through the south of the US in the autumn. Even so, they were surprised by the scale of the increase, which took profits from current production to 10.6 per cent of national income -- a level surpassed only once since 1968.
Earnings have risen fastest in the energy and financial services sectors where high oil prices and trading opportunities created by low interest rates have driven earnings to record levels.
Exxon, the world's largest oil company, saw profits jump 27 per cent in the fourth quarter to a high of $8.4bn. Wall Street bank Lehman Brothers saw earnings grow 31 per cent.
Weaker consumer spending as well as rising interest rates are expected to slow growth in profits slightly, but Wall Street nevertheless expects strong comparisons for the first quarter.
The 500 largest companies are expected to grow by between 10 and 11 per cent in the first quarter, according to Thomson Financial, compared with 19.7 per cent in the fourth quarter.
Michael Thompson, research director at Thomson said: "In absolute dollar terms, US companies have never recorded the profits that they will record in 2005. They are operating very efficiently and the underlying economy is fairly robust too."
Yet only recently has big business begun to show enough optimism to- spend more on capital investment. A survey last February by the Business Rountable found confidence at record levels, but hiring expectations relatively modest.
Wall Street also expects corporate America to continue generating considerable surplus cash.
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