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Profitability remains a difficult challenge even after the economy returns to health next summer, and beyond. Before the economy went south, profit growth was fairly strong. Above average productivity gains were offsetting subdued gains in labor costs. Back in the golden era (1995 to 2005), price hikes were kept to not much more than 2%. But that was enough to generate strong profit growth, which set off a long and strong bull market on Wall Street. The number of workers increased on average 1.1% annually, earnings rose about 4% a year and workers’ real spending power increased by 2.2%. With a productivity gain of a little more than 2% profits (net of inflation) rose 5% a year, which rallied stocks.

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