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Corporate profits should steady the economy

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Profits at American companies are poised to be one of the few bright spots in the economy, helping to steady the faltering recovery, Bloomberg reported.

Earnings will climb an average 10 percent a year through 2013, more than three times quicker than the economy, after what has already been the fastest profit rebound since the late 1940s, JPMorgan Chase & Co. projects.

In mounting signs of confidence, Macy’s Inc. has raised its annual profit forecast, Intel Corp. and Target Corp. increased dividends and E.I. du Pont de Nemours & Co. plans to invest more than $500 million to boost production.

Surging overseas sales, improving U.S. demand and Federal Reserve policy-makers’ pledge to keep interest rates close to zero for an extended period bode well for earnings, said Robert Mellman, an economist at JPMorgan who has tracked corporate profits since 1985 and published a special report May 20 on the subject.

Widening margins will give businesses the means and incentive to invest and hire, paving the way for accelerating growth in the world’s largest economy, he predicted.

“Corporate profits have plenty of room to run,” as “returns on investing and expanding are high,” Mellman said in a June 10 interview from New York. “This makes companies want to grow the business. As profitability remains strong, they’ll increase hiring.”

The recent spate of weak economic data, capped by news that payrolls grew in May at the slowest pace in eight months, is sparking concern about the expansion’s sustainability, Bloomberg said. Even so, private employers have added 2.14 million workers since job creation resumed in March 2010, nine months after the recession ended. That’s about a quarter of the 8.8 million positions lost during the 18-month slump.

JPMorgan projects that growth will pick up in the second half of 2011 as higher energy costs and supply-chain disruptions subside. The economy will return to a 3 percent annual growth rate in the third and fourth quarters, with profit gains accelerating to 10 percent, Mellman said.