Variant Perception says equity prices are rising and being driven by momentum, but profit margins are set to fall further in line with late-cycle wage pressures and tightness in the labour market.
Please consider US Profit Margins to Fall Further.
The biggest cost to businesses is the cost of employees, and the unemployment rate leads the ups and downs of corporate profits as a percentage of GDP by about two years. There is still a long way to fall for corporate profit margins. This relationship holds going back over fifty years, although we only present the chart since the early 1980s for sake of clarity.
Variant Perception has built a leading indicator for wages, which leads the ups and downs of average hourly earnings by about a year and a half. VP’s leading wage indicator also leads corporate profits as a percentage of GDP by about 21 months. Lower earnings and lower returns on equity are baked in the cake.
Unemployment Rate vs. Corporate Profits
Profit Margins vs. Wages
The charts in the link are small unless you open them up. I did so on the first and immediately thought “what about wages?”
So I went into Fred and found a chart of wages, overlaid it on the first chart and noted the match was close but not quite right. Also it was difficult to match the scales precisely.
After playing around with the idea for a while, I returned to do this post and expanded the second chart.
The answer was right there in the text, but I missed it. In addition to problems of matching scale between Fred and Variant Perception, the first chart was offset by 2 years, the second 21 months.
Additional factors are in play. Here’s a list to ponder
Falling Corporate Profit Factors
- Rising minimum wages
- Retirement
- Corporate profit mean reversion
- Slowing global economy adds downward price pressures
- Increase in subprime lending will increase writeoffs
- Housing unaffordability will eventually stall the sector
There are many reasons to expect corporate profits to decline. Variant Perception has nice charts explaining one set of reasons.
Mike “Mish” Shedlock
Hope and Change. We had Change part, now comes the Hope part; “Hope is an emotional state in the absence of information”. Mission Accomplished.
I guess that’s how it goes in a Democrat Party, Fascist Economy.
Revenues down, profits down, but government crony brides up Up uP UP!!!!!!!!!!!!
Well, we have negative interest rates so why can’t we have negative earnings (i.e., losses)? Would that cause stock prices to fall? Or will central banks just print money and buy them up?
As Rahm said, why waste a good crisis: Crash stock prices, then buy up the carnage with newly printed paper. What easier way to own the world? If the central banks owned the companies, then the companies could lobby Congress to give the central bank (Fed) more power. Maybe not immediately, but in a few cycles.
Should now be obvious why QE (money printing) and lower interest rates (NIRP, ZIRP) cannot boost business borrowing. Who wants to invest in a stagnant economy with escalating costs and regulations. With Hillary leading in many polls and promising business income tax increases and exit taxes, might as well wave a banner telling businesses to disinvest in the USA as quickly as possible before Hillary can act. All the anti-corporation protesters should be very happy, though they probably will never correlate any of this with their dismal job prospects.
This also explains “helicopter money,” the idea of forcing large government deficits to be monetized by central bank fiat currency. In other words, if businesses and consumers do not want more debt, then get government to create more debt to monetize. Next step would be central banks issuing their own debt and launching stimulus programs; e.g. central bank armies, central bank-owned enterprises (bought via ETFs), etc. Central Bank Republics as sovereigns, since they are already acting like Monetary Popes and telling nation-states what to do.
For some reason which I suspect is due to an outright inability to think critically, so many people just can’t seem to get the fact that a business does not “eat” the additional expense caused by taxes, it simply passes that cost on to its customers who in many cases would be the idiots wanting higher business taxes. Larger businesses will simply play the Cayman Islands tax shelter and other legal accounting tricks to avoid paying taxes or a large portion of them. The same idiots wanting higher corporate taxes would scream bloody murder if their wages were reduced at the businesses where they work in the effort to balance the books to compensate for a greater tax burden.
Business taxes for businesses located in the US should be ZERO. That would be a real incentive for businesses to locate here vs elsewhere.
Business taxes for businesses located in the US should be ZERO. That would be a real incentive for businesses to locate here vs elsewhere.
Absolutely correct
Look at the nannycrats in Brussels whining already because the UK is going to lower corporate taxes.
Mish
Not on subject, but you’ve raised the subject before. More info on Turkey, Putin… You can see the pivot points here. The beginning of the end of NATO coming to pass?
https://www.youtube.com/watch?v=QI9NiHKGurI
Change and sanity, yes, but Turkey is unlikely to leave NATO. A little realignment that is all.
Two other factors:
1) reduced disposable income. Costs for health care, pharmaceuticals, and utilities continue to rise steeply. Corporate earnings cannot increase significantly unless health costs can be reduced.
2) devaluation of the yuan. American corporations are taking substantial market losses in China. China seems likely to further devalue the yuan, which would lead to diminishing profits for American corporations.