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How US companies have managed to keep profits strong despite a sluggish economy

WASHINGTON – The U.S. economy is growing at a tepid pace, job growth is subpar, pay raises are scant and business investment sluggish. Yet U.S. companies have been producing solid profits and lifting their stock prices.

Here’s how:

— KEEPING PAY DOWN

Workers’ wages and salaries amounted to slightly more than 42 per cent of the U.S. economy in the April-June quarter, just above a record low. With unemployment still high, employees have had little leverage to demand higher pay. Smaller paychecks, in turn, have deprived Americans of money to spend.

— CUTTING COSTS

With consumers holding back on spending, corporate revenue has slowed even as the economy has recovered from the recession. To keep their profits growing as revenue lags, companies like Kellogg and FedEx have slashed costs. Many have held back on investment and expansion.

— HOARDING CASH

U.S. companies have stockpiled a record $1.8 trillion in cash, according to the Federal Reserve. And thanks to the Fed’s efforts to keep interest rates low, large companies have borrowed at low rates and replaced higher-cost debt. All that has bolstered corporate finances and helped boost the stock market. Yet companies remain cautious about expanding.

— GLOBALIZING

Large U.S. companies are earning a larger share of their profits overseas than in previous decades. That means their profits and stock prices can grow even when growth in the United States is weak. Overall, roughly half of all sales earned by companies in the S&P 500 index are now earned outside the United States.