Albert Edwards: "Has The US Recession Already Begun?"

Tyler Durden's picture

Some are surprised that inflation has failed to take off despite massive amounts of quantitative easing. The explanation, ECRI explains, is simple: recession kills inflation. For all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009. The 'r' word is seldom heard on the lips of the mainstream media - how absurd - but as SocGen's Albert Edwards notes, if anyone is waiting for the ISM to tell them that a recession has started in the US, they are looking at the wrong data. Much more importantly, Edwards explains, we may well be in for a double dose of bad news - both falling revenues and falling margins. History suggests this as good a leading indicator as any other for whether the US economy will endogenously fall back into recession.

Via SocGen's Albert Edwards:

One of the axioms of economics I have always had a great deal of faith in is that profit margins mean revert.


But unfortunately at the height of a recovery most commentators forget this as they become intoxicated by the equity market's prior stellar performance and tend to continue to price the market off analysts' forward earnings - which inevitably always forecast further healthy gains ahead. Even the use of trailing earnings for PE calculations tends, in retrospect, to be too optimistic. That is why cyclically adjusted PEs are so important.




excluding financials, profit margins have failed to break out above their usual range. As night follows day, the market should be pricing in a decline in the margin cycle from here.





The surprisingly weak out-turn in May for the US manufacturing ISM seems to me just a continuation of what we have seen for the last few years, with mini-cycles of optimism and pessimism anchored to a clear downtrend





It is also notable that just as the last recession was starting in November 2007, the ISM was embarking on a surprising six month long H1 2008 recovery back above the key 50.0 mark, before plunging in August and September ahead of the Lehman bankruptcy... The bottom line here is that if anyone is waiting for the ISM to tell them a recession has started in the US they may be looking at the wrong data.




We find profits data far more useful to determine if a recession has started or indeed about to start. The results are 'shocking':


"In the S&P 500, there have been 91 negative EPS preannouncements issued by corporations for Q2 2013 compared to 13 positive EPS preannouncements. By dividing 91 by 13, one arrives at an N/P ratio of 7.0 for the S&P 500 Index. This 7.0 ratio is higher than the N/P ratio at the same point in time in Q2 12 (3.4), and is above the long-term aggregate (since 1995) N/P ratio for the S&P 500 (2.4)."


Reuters goes on to say that if this persists it would be a record pace of downgrading ahead of a reporting round.




In addition to the margin downturn, revenue growth is also flagging badly. Thomson Reuters also reports that revenue forecasts are being missed at an increasingly rapid rate. Indeed, the latest slide in the ISM below 50 suggests we are now close to outright yoy decline



Thus we may well be in for a double dose of bad news - both falling revenues and falling margins. History suggests this as good a leading indicator as any other for whether the US economy will endogenously fall back into recession.

AS ECRI confirms:

Despite surging prices for homes and equities, consumer spending is contracting, registering its biggest monthly decline since September 2009. Quite simply, the wealth effect is rendered moot by languishing incomes.


No wonder yoy U.S. import growth has also plunged into negative territory, whether or not oil imports are included. In recent decades, this has happened only during U.S. recessions. Notably, unlike data for GDP and jobs, imports data are not revised substantially, long after the fact.


As a result, core inflation – defined as yoy growth in the Personal Consumption Expenditure (PCE) deflator excluding food and energy – has now dropped under 1.1%, to the lowest reading in its entire 53-year record.


Meanwhile, yoy growth in the headline PCE deflator has dropped to 0.7%, its lowest reading since October 2009, and far below the Fed's official 2.0% target. This inflation measure has never been this low except during or in the immediate aftermath of recession.

The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009.

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BLOTTO's picture

It began (the recession) over here, when Christopher 'Columbus' founded this experimental land so that they can experiment on the will of the people...



NotApplicable's picture

Will there be juice and cookies? I was explicitly told there would be.

bonin006's picture

No juice for you, but Kool Aid will be mandatory.

kaiserhoff's picture

Thought experiment.

What would the economy look like without 92 month, zero interest car and truck loans to anyone who can fog a mirror?

BraveSirRobin's picture

It would look like an economy with 120 month, zero interest, manufacturer cash incentives for signing, car and truck loans to anyone who can sign for someone else economy.

Tinky's picture

Dear Al –

Yes. And duh.

CrashisOptimistic's picture


No, this is wrong.

The EPS gains in the market are not derived from recession or growth.  They are derived from reducing the denominator in Earnings/Share.  The companies CFOs are borrowing 0% money with which to buy back shares.

You can raise EPS for a long time with no significant margins by shrinking the denominator.

gatorengineer's picture

or cutting staff and inventories to beyond the bone, and creating short term profits, at the expense of R&D etc...

RSloane's picture

What do you mean "begun"? The US recession never ended. We just went long wall murals of amber waves of grain.

IndyPat's picture

The recession did end. Dead. Great job everyone.
The depression seems to be ripping along nicely, though. How's about tackling that part now.

Bay of Pigs's picture

Well, that was a total waste of time reading that. More abuse of statistics that ignore reality.

No inflation? HAHAHA...

BraveSirRobin's picture

Remember, all the QE has gone to prop up financial balance sheets, not into the real economy. They have just been papering over the losses for the banks and brokers.

zhandax's picture

Well, that was a total waste of time reading that.

Agreed.  He totally missed the point.  Recession does not prevent inflation, if the 70's really happened.  I remember in high school looking at a new 74 Camaro in the showroom @ $3600 and the next year seeing the same car in a 75 model @ $7300.  I think the major change was the wrap around rear window.  Excessive fiat production papering over an unmanageable mountain of debt coupled with Reserve currency status can kick the can for several years, but, at some point, reversion to mean is a real bitch.

falak pema's picture

have u left soc gen Lord Edwards, to achieve more credibility?

insanelysane's picture

..."consumer spending is contracting", but once gas hits $5/gallon and milk $10/gallon, the data will show consumer spending is up!

Nue's picture

Not to mention a huge drop in Inflation.

lakecity55's picture

Bath House: "Yes, gas is 7$ a gallon, but I haved saved it from being 10$ a gallon, so I have saved American Jobz."

Nue's picture

Reccession Begun? What day is it? Did I go through a time warp to 2007 or something?


Dr. Engali's picture

So Albert is upgrading the economy from a depression to a recession huh? That's great news!

Seasmoke's picture


It never ended.

I Am Not a Copper Top's picture

Nope.  The gubmint says everythang be otay.  And my EBT still be workin so...


and S.   T.   F.   R.  

caimen garou's picture

recession? what freaking recession! more like a depression for the last...... how many years now? I lost count!

q99x2's picture

Good now I won't bother thinking about going to work. In a couple of years when I reach 20 years of not working maybe then we will be out of recession. Maybe not.

OpTwoMistic's picture

When did it end?

Winston Churchill's picture

The economy died , and no one noticed.

The smell is getting pretty gamey.


Ms. Erable's picture

'Weekend at Bernanke's' is not nearly as much fun as the prequel.

kito's picture

to paraphrase ron paul, there is little difference between the depression of the 30s and now.........there are 50 million people in the bread line.....except this time the line is invisible and electronic...................................

caimen garou's picture

like uh, SNAP went the economy!

debtor of last resort's picture

Has the us recession already begun? 50 million on stamps and 90+% of the populace don't have a clue what's going on?

The rhyme of history will shake things up bitchez.

Haole's picture

Why do they keep calling a depression a recession?  /sarc

Mr_Wonderful's picture

Also; the world is absolutely drowning in all sorts of stuff. Understandably people are getting a bit tired of going into debt to chase falling prices.

kevinearick's picture

They can't do this crap without majority robot participation, and as long as they have it, they are going to use it.

So, things are going to get worse, until they get much worse, as they throw each layer of family law under the bus, to protect themselves. In their short memory they have never lost employing this method. History says they lose every time. The bigger the demographic ponzi, the greater the loss.

It's not a negotiation.

In case anyone has not been able to follow along, we are at the 'family office' level, of which SAC is a simple low-level example. Take a look at the Private Investment Counsel.

expres12's picture

The last one never ended...

orangegeek's picture

Dow Jones broke key channel support yesterday.  Outlook is bearish.


Much effort made today to drive the US Dollar down hard to keep the US indexes up - and after the Dow being down about 120 points, it is now magically up 50.


Euro, Yen and GBP are all up over 1% - wait the Yen is up over 2%.  Long those Yen - Japan is in great shape.  LMAO

BraveSirRobin's picture

I'm confused. I thought bearish was bullish.

Straw Dog's picture

One of the points John Hussman often makes is that "profit margins over time average 6%"

And at this time they are at around 11%

He also quotes Warren Buffet
“In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%... Maybe you’d like to argue a different case. Fair enough. But give me your assumptions. The Tinker Bell approach – clap if you believe – just won’t cut it.”

Profit margins have plenty of room to fall.

disabledvet's picture

That's why the bat phone is always ringing off the hook about nuking the dollar. Forget profits...revenues are what businesses strive to prove...profits have been off the charts...treasuries have rallied...the dollar has bottomed...Wall Street goes after treasuries but the Fed slams the door on the cookie jar...yet again. "stop using logic to define what actually is." this is a market...not a science project.

The worst trader's picture

I missed the memo, BTFD!

alfbell's picture



Inflation may have failed to take off because of this (excerpt from Hoisington Quarterly Review and Outlook).  

“The Federal Reserve is printing money”.

No statement could be less truthful.  The Federal

Reserve (Fed) is not, and has not been, “printing  

money” as defined as an acceleration in M2 or

money supply.  Just check the facts.  For the first

quarter of 2013 the Fed purchased $277.5 billion in

securities (net) as their security portfolio expanded

from $2.660 trillion to $2.937 trillion.  A review

of post-war economic history would lead to a

logical assumption that the money supply (M2)

would respond upward to this massive infusion

of reserves into the banking system.  The reality

is just the opposite.  The last week of December,

2012 showed M2 at $10.505 trillion, but at the

end of March, 2013 it totaled only $10.450 trillion

which was an unexpected decline of $55 billion. 

Printing money? No.

This broad misconception of the Fed’s

ability to print money has been widely embraced

since the Fed began its massive balance sheet

expansion near the end of 2008.  It was then that

the Fed expanded the monetary base from $840

billion to $1.7 trillion in a matter of months. 

Further, from the initiation of this misguided

program to the end of March 2013, the Fed has

expanded the monetary base from $840 billion to

$2.93 trillion.  The money supply indeed went up

(35%) but not in proportion to the increase in the

monetary base (249%).  Presently, the year- over-

year expansion of M2 is only 6.8%, which is nearly

identical to its year-over-year growth rate in March

of 2008 before the Fed decided to “help out the

economy” (Chart 1).  In other words, there is no

evidence that the massive security purchases by

the Fed have resulted in a sustained acceleration

in monetary growth; nor is there evidence that

economic conditions have improved.


BraveSirRobin's picture

You wrote that in bold, so it must be true.

roadhazard's picture

"back into recession..."  lol, I love the propaganda spew that we were ever out of recession. The depression is already five years old, better learn to love it.

lakecity55's picture

These must not be real people.

Everyone I know thinks we crashed in 08 and have stayed crashed.


Coast Watcher's picture

Another mental midget who is just now noticing that the economy has been in the crapper for five years? What is this, the Last Train to Obvious-ville?

AllWorkedUp's picture

Short answer? It never ended. Except for the Banksters.

Shizzmoney's picture

Lak over at ECRI thinks we've been in one since July 2012.

alfbell's picture



We're not in a recession, crisis, panic or depression. This system is going to be pronounced DEAD in the not too distant future. You could say that we are in INTENSIVE CARE. The doctors have a few more ideas up their sleeves but they can't promise anything.

Lucky for bread, circuses, government propaganda and the main stream media... or there'd be BLOOD IN THE STREETS.

Uncle Zuzu's picture

There is a big mystery in the economy, but not as big as Albert Edwards still having a job after decades of being wrong, almost all the time.