Saturday, January 23, 2016

23/1/16: Corporate Profits v GDP: Not a Good Sign

One interesting relationship in recent weeks has been flashing red: the relationship between annual nominal GDP growth rates for the U.S. and the reported growth rates in corporate profits for non-financial corporations. 

Source: Author own calculations based on data from Fred

As shown in the chart above, growth rate in non-financial corporations’ profits has recently dipped below zero, posting -4.26% reading in 3Q 2015. The last time corporate profits took a nose dive was in 1Q 2014. Over the last four U.S. recessions, corporate profits growth rates have been a relatively consistent lead indicator of troubles brewing ahead.

Things are not exactly on a healthy side. While two quarters separated by more than a year of positive data may be just a glitch, it is worth noting that since 1989 on, there have been no period in which a recession was not preceded by decline in corporate profits, sometimes (1991 case) as far out as 2 years ahead.

But you can take my word with a grain of salt, so here’s Citi Index of corporate profits… 

Bloomberg headline that accompanied it: “Global earnings downgrades haven’t been this bad in 7 years”.

Ah, the repaired world…

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