Business managers, with little opportunity to raise prices, have moved aggressively to stabilize cash flows by trimming workforces. These efforts have limited any rise in unit costs, attenuated the pressure on profit margins, and ultimately helped to preserve the vast majority of private-sector jobs.
To the extent that businesses are successful in boosting profits and cash flow, capital spending should begin to recover more noticeably. Part of the reduction in pricing power observed in this cycle should be reversed as firming demand enables businesses to take back large price discounts. Though such an adjustment would tend to elevate price levels, underlying inflationary cost pressures should remain contained.