Earlier this week I discussed the expectations for an increase in reported earnings of 50% over the next two years:
"Currently, according to the S&P website, reported corporate earnings are expected to grow by 20.26% in 2014, and by an additional 20.28% in 2015. In total, reported earnings are expected to grow by almost 50% ($100.28/share as of 2013 to $147.50/share in 2015) over the next two years."
However, as I also noted, the rise in corporate profitability has come from accounting magic and cost cutting along with a healthy dose of share buybacks. Since there is "no free lunch," the drive for greater corporate profitability has come at an economic expense. Since 1999, the annual real economic growth rate has run at 1.94%, which is the lowest growth rate in history including the "Great Depression." I have broken down economic growth into major cycles for clarity.

As I discussed previously:
"Since 2000, each dollar of gross sales has been increased into more than $1 in operating and reported profits through financial engineering and cost suppression. The next chart shows that the surge in corporate profitability in recent years is a result of a consistent reduction of both employment and wage growth. This has been achieved by increases in productivity, technology and offshoring of labor. However, it is important to note that benefits from such actions are finite."
The latest report on unit labor costs and productivity produced the following two charts which underscore this point and suggests that the current rate of economic growth is unlikely to change anytime soon.
I stated previously, that in in 2013 reported earnings per share for the S&P 500 rose by 15.9% to a record of $100.28 per share. Importantly, roughly 40% of that increase occurring in the 4th quarter alone. The chart of real, inflation adjusted, compensation per hour as compared to output per hour shows a likely reason why this occurred. The sharp increase in output per hour combined with the sharp decline in compensation costs is a direct push to bottom line profitability.

However, it was not just a decrease in compensation costs but in total labor costs as well which includes benefits and other labor related costs. This suggests that the drop off in hiring in the 4th quarter was more than just "weather" related.

Labor costs are one of the largest detractors from net profitability on any income statement. The problem with cost cutting, wage suppression, labor hoarding and stock buybacks, along with a myriad of accounting gimmicks, is that there is a finite limit to their effectiveness.
I say this because of something my friend Cullen Roche recently pointed out:
"We’re in the backstretch of the recovery. We’re now into month 47 of the current economic recovery. The average expansion in the post-war period has lasted 63 months. That means we’re probably in the 6th inning of the current expansion so we’re about to pull our starter and make a call to the bullpen. The odds say we’re closer to the beginning of a recession than the beginning of the expansion. That puts the Fed in a really odd position and not likely one where they’re on the verge of tightening any time soon."
This is a very important point. While the Fed's ongoing interventions since 2009 have provided support to the current economic cycle, they have not "repealed" the business cycle completely. The Fed's actions work to pull forward future consumption to support the current economy. This has boosted corporate profitability at a time when the effectiveness of corporate profitability tools were most effective.
However, such actions leave a void in the future that must be filled by organic economic growth. The problem comes when such growth does not appear. With the economy continuing to "struggle" at an anaemic pace, the effects of cost cutting are becoming less effective.
This is not a "bearish" prediction of an impending economic crash, but rather just a realization that all economic, and earnings, forecasts, are subject to the overall business cycle. What the unit labor costs and productivity report suggest is that economic growth remains very weak. This puts current forward expectations of accelerated economic and earnings growth at risk. With asset prices extended, valuations rich and optimism at extremes, such a combination has historically become a rather toxic brew when exuberant expectations fail to align with reality.
it's all good what time does shark tank come on tonight, love watching cryptos try to take advantage of decent hard working 'merkans
It's on after the dip in paranha lake.
"they have not "repealed" the business cycle completely"
THE HELL THEY HAVEN'T!! Time to double down on Twitstergram and Cristal, baby!
OOOOOOhhhh
Is Twistergram where naked Russian models play twister and you get the pictures sent to your phone???
The current business cycle is a two-speed....moar and moarer
To paraphrase a popular lefty meme, "they have [contemporized] the gains and [postponed] the losses."
Yes, the I have a good idea but because the entire retail market is owned by the crooks I must sell to the crooks to make a little money show.
Take a decent product, send it to China and manufacture it for $.25 and sell it on Walmart As seen on TV shelves for $19.95.
A third and most important chart would be the Brent price...
The above are nothing more than symptoms....
The oil - the cheap oil, that built the 1st world is gone. There is no cheap surplus to grow economies.
Negative growth rates lie waiting on the other side of the boundary zero.
We cannot drill our way out nor build our way out, we can only die out.
When the world population collapses from starvation, disease and bad weather, the few left will feast among the rags while the oligarchy hides it in its bunkers picking off the survivors with drones for sport.
Beware the future, enjoy now, it may not last...
It's really a quit good post! Insightful but not made to spread enjoyment from either biased side. There's one thing I'll add. Without some recovery of heavy industry (Which won't happen because Fed Gov. won't allow it as proven by Agency programs from EPA, NLRB and others plus growth and allowances of Class action law suites. Read my fairly long article Entitled Americas "Economic Recovery", plus "Fatal Imbalance" There are other but those cover your very good predictions in some detail.
hedgemastermb.blogspot.com
There is no more business cycle. There used to be production, profits, consumption, and loss.
The new market doesn't need production or profits. Consumption is below typical depressionary levels.
All that exists is the flow of funds from the Fed to cover any loss. From that is derived corporate profits. Cash made from selling shares and buying shares back.
Bingo. $2B/day (or whatever) levered up 50:1 or 100:1 to pay for it all.
"The Fed stole the handle and the train won't stop rolling.... no, it wouldn't slow down". J. Tull
>>>This is not a "bearish" prediction of an impending economic crash
Wait what?? Had to double-check to make sure I was still on Zero Hedge.
Bonus chart: http://data.bls.gov/generated_files/graphics/latest_numbers_LNS11300000_1999_2014_all_period_M01_data.gif
(Labor force participation rate 1999-2014, link opens in new window/tab)
Good chart. I really need to whip that one out when I hear " oh, but the unemployment numbers are dropping so things are getting better!" Certainly more useful than a smack to the side of the head.
Miffed;-)
Backstretch of the recovery... there will be no recovery until the mob is run out of government.
2014 will be the beginning of a new recession if not Something worst!
I own a business that dropped 20% from 08 and 2013 droped another 10%.
For lease signs on our street for Over a year!
Similar here. My business' income leads the business cycle by about 6 months, I started to see the '08 collapse in my Q2 billings, and it was super obvious by Q3.
I just went ahead and did a dump of the books:
2008 -27%
2009 17%
2010 3%
2011 35%
2012 -11%
2013 -18%
Not enough data for Q1 Y-o-Y, but it's looking slightly down so far.
Another perspective from real world (business owner):
From January 2002 through January 2009, our average YOY growth rate was 22%. In January 2009, our sales dove an immediate 25% YOY. We spent January 2009 through December 2014 on a slow bleed with total sales minus 8% from February 2009 to December 2013. We remained profitable, but it was a real struggle. We froze hiring, and spent 5 years reducing overhead wherever possible, including moving to a smaller office, selling company cars, letting go of janitor, etc.
January 2014: Another immediate 18% hit.
If this 'cliff dive' happens like it it did in 2009, we will NOT recover from this 18% YOY decline (as can be seen in our numbers from January 2009 through December 2013)
My seflish view is: "Brace for trouble!"
My Company view is:
1. There is nothign left to cut on employees. Our hiring freeze will turn into layoffs after just 30 more days of bad signals.
2. There is nothing left to cut on expenses, so this adds to the critical "knee jerk" requirement to respond to Number 1 above very quickly.
Now here is the kicker: I said we were profitable (barely), for those 5 years since 2009. Guess where those profits went? Directly into my personal savings account! No Cap Ex. No company reserve. No employee benefits. No additional marketing efforts, etc. etc.
I am very scared for all that do not have savings right now. I promise you I am NOT the only business owner that found it prudent to forget company growth and focus on personal balance sheet instead. IF the shit hits the fan this second time around, WATCH OUT BELOW because I just know business owners are NOT GOING TO HANG IN THERE FOR A SECOND BEATING.....they are going to take what they have and ride the storm out. Look around you and you will see that EVERYONE with the means to do so is grabbing cash......they will not stop because they know what might be coming.
This is the REAL reason the middle class is dead (or soon to be doomed).....they've been tapped dry by the system that encourages people like me to be SCARED TO INVEST A PENNY IN THIS JOKE OF AN ECONOMY!
The Public Be Suckered
http://patrick.net/forum/?p=1230886
If you haven't watched this video, you cannot possibly understand where we are going. I read these analysis from varied individuals and I see them trying to make sense of what is going on. They are living in the petroleum age and haven't got a clue.
https://www.youtube.com/watch?v=dLCsMRr7hAg&index=2&list=FLSIcLl4SLNDiPv...