Even slight changes in overall economic growth have an outsize effect on corporate America's bottom line. But with economic growth slowing, it's possible that profits, because of this same operating leverage, could turn negative at some point next year even if the economy doesn't. If you run a match factory, for example, you've got a lot of costs that depend on how many matchbooks you sell, like paper, sulfur, something called celite. But you also have costs that occur no matter what, like keeping the lights on, paying salaried workers, making sure the ventilation system and fire extinguishers are well maintained. When demand increases, those fixed costs represent a smaller portion of total sales, and more of your top line makes it to the bottom line.
Profit margins expand.
But when demand slows, you still have to pay those costs. But Greenlaw worries what would happen if the economy grew by less than the 3.4 percent that his firm is forecasting. And when profits did dip into the red in 1998, the economy was steaming. Greenlaw reckons this breakdown is a result of a global economy that was not running alongside that of the United States. In 1998, for example, while things were fine here, much of the world was getting crushed under the heel of crisis.