Monday, February 15, 2016

Corporate America - The Profit Recession

Now that the end of the earnings season has arrived, it's looking increasingly likely that the United States has entered a profit recession.  Corporate profits have been weakening for nearly a year, suggesting that the economy has already entered another slow growth (perhaps even a negative growth) phase.

Here is a graph showing how after tax corporate profits have been more-or-less level since early 2012:

Here is a look at how year-over-year corporate profit growth has completely stalled:

If we go back to 1970, we can see just how weak the current year-over-year growth in corporate profits is compared to other economic expansions:

Here is a graph showing after domestic tax corporate profits as a percentage of gross domestic product going back to 1947:

It also appears that this indicator suggests a slowdown in corporate profits which have dropped from a peak of 7.3 percent of GDP in Q4 2011 and 6.9 percent in Q3 2014 to 6.2 percent in Q3 2015.

Why would profits for U.S. corporations be under such pressure?  Here is a chart that shows the key reason:

It is very apparent that one of the main reasons for negative pressure on Corporate America's profits is the strength of the U.S. dollar.  With the Federal Reserve being one of the only developed economy central banks (and the only influential central bank) that is actually raising rates, currency investors have been fleeing to this perceived save haven in a global economy that is rife with problems.  Since July/August 2014 when the Fed began to telegraph its higher interest rate policy, the dollar has strengthened by just under 20 percent.  While this is great news for American consumers of imported goods and services, it makes U.S. exports very expensive for consumers outside of the United States and means that American consumers are more likely to purchase cheaper, foreign goods.  This results in significant pressure on domestic producers and their profit margins since consumers in other nations are less likely to purchase expensive U.S.-produced goods.  This also suggests that, rather than raising rates further, the Federal Reserve will be under pressure to actually drop rates to weaken the value of the U.S. dollar, making its policies more competitive with European nations and Japan, both of which have either negative interest rates or rates that are far lower than the Fed for the most part.  

Since the end of the Second World War, each broad economic recession has been preceded by a profit recession.  While Corporate America has not yet entered a full profit recession, the trends would suggest that the next quarter or two could see a contraction in earnings per share growth.

No comments:

Post a Comment