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Guest Post: GDP And Profits - An Economic Malaise
Submitted by Lance Roberts of Streettalk Advisors
GDP And Profits - An Economic Malaise
This morning GDP was released and it came in slightly, but statistically insignificant, better than the previously released 2nd revision of the 4th quarter 2010 GDP Estimate.
The main issues that popped out of the release was the downturn in imports which, given the rise in oil prices in the first quarter of 2011, is very unlikely to be a beneficiary to GDP in the coming months.
More importantly, the acceleration in the Personal Consumption Expenditures (PCE) reflects a continued drag on the consumer base (70% of the recent release) and their ability to continue at their recent pace of consumption as the acceleration was largely in food and energy. This has been quickly reflected in the large drop in the recent Durable Goods report earlier this week.
None of this is very surprising or enlightening. In the coming releases of GDP we will see the import component jump, exports lag, and consumption fall. Analysts are already scrambling to bring down their overzealous estimates from the end of last year and this will all eventually show up in corporate profits.
Which brings me to our chart(s) of the day. Since corporate profits have been the main focal point of the mainstream media in justifying the bear market run up since 2009 it is important to focus on exactly where those profits are coming from and, ultimately, what their impact will be on the future economic growth.
The first chart is corporate profits with inventory valuation and capital consumption adjustments broken down between financial and non-financial sectors. As you will notice financial profitability is doing much better than non-financial companies. As regular readers know this is not surprising given the lack of real accounting issues (markup to myth) and Federal Reserve programs pumped through the financial sector to buoy asset prices.
However, notice that the NON-Financial profits may have reached their peak. We have been speaking about the impacts of rising inflationary input costs to the manufacturing sector. The very real danger to investors is the current Wall Street valuation models that use the never ending steam of overly optimistic assumptions of future earnings to justify why you should be 100% invested in equities. IF corporate profits decline; market valuations must be adjusted and they tend to adjust rapidly.
However, there is MORE to this story than just a correction in stock prices. The other half of this story is the future of our economy and the ability, or inability, to “grow” our way out of the economic malaise that 30 years of failed monetary policy has gotten us into.
The next chart is the percentage that financial and non-financial companies make up of total domestic corporate profits. This has been overlaid on a graph of the year over year changes in GDP.
I bring this to your attention for a very specific reason. In many of our previous postings we have discussed the issues with the growing debt/leverage of the American household since 1980 and the decline in savings which has impacted productive investment in the US. (The Saving Factor) .
The shift from a manufacturing/production based society to a financial/service based society has promulgated this decline in the growth of the economy for the last 30 years. This is shown by the linear trend line. Previous to 1980 personal savings was well above 6% and GDP on average grew at roughly 6%. At that time it took less than .50 cents of debt to produce $1 of GDP.
Since 1980 personal savings has steadily fallen as personal consumption has risen from 60% of GDP to over 70% of GDP. GDP has also slipped to below a 4% annualized growth rate and it is estimated that it takes more than $4 of debt for every $1 of GDP growth. The idea of leverage and use of credit has been widely adopted across all economic strata and the lure of fast money in the markets has turned the blue collar worker of yore into the Wall Street gambler today. Therefore, it is really no surprise that during the last 30 years financial sector profits have made up an ever larger percentage of total corporate profitability.
The problem with this, coming back to the economic malaise idea, is simply a financial transaction creates virtually NO economic throughput. It creates a commission or profit for the person executing the transaction but that is where it stops. If a brokerage firms executes a transaction between a buyer and a seller of a stock a fee is generated for the firm.
Whereas a manufacturing process, such as building a house, has an economic multiplier of 3 or 4x every dollar input. When a house is built it requires engineers, architects, contractors, workers, suppliers, manufactures, etc., etc. Each of these individuals and companies benefits from the process of building a single house which in turn requires them to hire workers, buy products, supplies, materials, etc. which in turn fuels economic growth. This is a very simplistic analogy but you get the idea as to why there has never been a true, organic, economic recovery without housing leading the way.
This is why as we look forward the impacts of Quantitative Easing and Permanent Open Market Operations, while supportive of the financial sector, yield little or no support to the ability of the U.S. economy to “grow” its way out of the issue in the future. Each step that we follow down the current Keynesian path of financial escapades continues to undermine the capability of productive economic growth and plunges us every deeper to towards the Japanese experience.
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Cooked books, bitchez
New housing sales are down 82% from peak. Put a fork in domestic growth until rre comes back whenever . Yes, it's that simple.
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Corporate profits---barely taxed, infrequently used to hire and for the owner of a share of stock---not earmarked for their wallet. Corporate profits are destined to end up in the private bank accounts of the select few wealthy individuals that have control or that regulate their behavior. They will throw you a dividend to keep you funding their ponzi. Now, thats friggin' cynical for a Friday afternoon.
You will never see large American businesses complain about our corporate tax code. After all, they wrote it!
So better GDP and lower u3 unemployment sure means we don't need qe3 or any more fed pump jobs.
United States= Japan part 2---i've been singing that for over a decade!!
The last paragraph in the post says it all:
Each step that we follow down the current Keynesian path of financial escapades continues to undermine the capability of productive economic growth and plunges us every deeper to towards the Japanese experience.
This is not what the US needs in 2011. Time to face the music.
A house made of sand you have built upon the savaged bodies of your victims.
Now you shall reap what you have sown.
Reap the whirlwind, bitches!
Doesn't anybody just look the Daily Treasury Statement? The proxy to gauge how U.S. corporations are doing in general: corporate taxes received by the U.S. Treasury (reported here at the daily Treasury Statement). The quarter through March 23 is a complete fizzle, a dud, at $35.7 billion, versus $51.4 billion during the same period last year. The remaining week of the quarter shows light collection, with the next large collection occurring in mid April. Evidence of an inflationary impacted Q1 2011 corporate-profit squeeze and disappointment looks quite convincing.
http://seekingalpha.com/article/260106-corporate-profitability-squeeze-is-baked-in
I am glad that you replied to this article because now I know where to find your articles. I remember you from the Winter blog which was so spot on before the onset of GFC. In specific , I remember your comments on fictitious capital and Minsky -- it really made me aware how the real economic world worked, plus the writings of Hypertiger. Those guys figured it out a long time ago!
There are only a few blogs out there that I follow: ZH, Steve Keen's Debtwatch, defunct Hypertiger's blog and naked capitalism. I am going to add yours.
Too much info.
If inflation kicks in on the supply side for manufactured goods (or what there is left of a manufacturing industry in the US) margins and profits will be hit big time. And inflation will kick in (if it isn't already).
DavidC
Operation bring the financials back from the dead principally by killing innocent civilians.
Profits in the financial sector are nothing more than a tax on the rest of the economy. When profits in the financial sector are rising versus non-financial, it just means the tax rate has gone up.
On the pragcap.com blog, this discussion concerns Modern Monetary Theory.
I was told that our deficits must = savings, every year. I guess that is true, regardless of the "theory."
When I asked where the 7% of GDP savings came from this year (after backing out 3% of imports over exports), the comment was, "mostly foreigners."
My question, regardless of the 'theory," if most of the savings accrues to foreigners, is that more risky than having our own citizens?
In addition, isn''t part of the savings intragovernmental, such as what Social Security owes thge Treasury?
Don Levit
How does 14.1 become 16.3? We buddies call a 100k a dollar. At meetings.