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What Happens To Sales And Employment When Corporate Profits Fall?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Corporate profits are back at the levels reached in 1990, 1999 and 2008 that presaged recessions and a sharp downturn in sales and employment.
It really isn't a surprise that corporate profits are falling: not only is the stronger U.S. dollar (USD) crushing the overseas profits of U.S. global corporations when reported in USD, but both the U.S. and global economies are slowing
Since corporations have slashed every possible cost to the bone in the past six years, slowing economies lead to lower sales which lead to declining profits.
Head-count has been slashed, suppliers have been squeezed, high-interest loans have been refinanced, under-performing stores have been shuttered, high-cost properties have been sold--there really isn't much left for Corporate America to slash and burn to skim more profit.
So what happens to sales and employment when corporate profits start sliding? Longtime correspondent B.C. kindly shared a number of charts to answer this question, and I've selected two to discuss.
The first is corporate profits, adjusted for GDP, the Consumer Price Index (CPI) and the trade-weighted U.S. dollar. The problem with nominal profits, or indeed any financial data point, is that they can only be analyzed in the context of the factors that affect their purchasing power in the real world.
For example, nominal corporate profits might rise by 10% a year, a number that looks very positive in isolation. But if inflation is running at 15%, then those profits are actually lagging the general decline in purchasing power.
Profits earned in currencies that are weakening are another example of nominal numbers not telling the real story.
This is why I often post charts of financial data priced in oil or gold--real-world commodities that cannot be gamed like unemployment, profits and a host of other data that is deemed important.
This is the value of B.C.'s chart: this is corporate profits adjusted for the critical economic contexts of GDP, CPI and the trade-weighted USD.
Profits have rolled over, after topping out at 2007 levels:
The second chart displays corporate profits, real final sales and employment. In this chart, corporate profits are adjusted for real GDP (i.e. adjusted for inflation). Note that profits lead sales and employment: when profits drop, sales and employment typically follow. This chart tracks year-over-year (YoY) changes:
Corporate profits are back at the levels reached in 1990, 1999 and 2008 that presaged recessions and a a sharp downturn in sales and employment. Profits adjusted for real GDP are noisy, but the recent drop in profits is clear.
If recent history is a reliable guide (and why wouldn't it be?), sales and employment have both topped and are about to fall sharply. At this point, it's wise to recall what the Federal Reserve cannot do:
1. It cannot force employers to hire more employees or pay them more.
2. It cannot force households or enterprises to borrow more money.
3. It cannot force households or enterprises to spend disposable income on non-essentials.
I suspect many households are like ours--tightening their belts and spending as little as possible in order to pay higher property taxes and federal and state income taxes.
Given the risks of a slowing economy, it's crazy to hire more employees or borrow more money unless the return on those investments is immediate, immensely profitable and recession-proof. Few investments meet those criteria.
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Well....BTFD....
2. It cannot force households or enterprises to borrow more money.
Why not?
We made them buy healthcare. If they don't....we just fine them....which is actually less expensive.
They have made us pay income taxes which is the single biggest purchase of the year for many of us.
Think about that for a minute. In their twisted mind our taxes are just more economic activity which enriches them while also pushing up those wonderful graphs we all love.
So true. If true to form then the government will react to increasing unemployment by boosting the minimum wage and taxes.
Buy or else!
Business is on parade
Corporate scam charade
Higher unemployment results in robuster GDP growth, right? Isn't that what Pelosi said? I know, I know, it's paradoxical but that's the way merika works nowadays.
Round 2 of the "2008 crisis" beginning as scheduled.
They go to the moon, like the S&P?
Well, comporations/people should be allowed to FAIL! Bailouts are the fucking problem.
But how would that bolster our confidence??
"Well, comporations/people should be allowed to FAIL! Bailouts are the fucking problem."
100+ up arrows. Let the bastards pay for their bad decisions! WTF do I always have to pay for their mistakes?
It's the unequal baliouts that are unfair. Wall Street, Bankers, CEOs walk away with Billions while the private sector Middle Class has to eat all their "bad judgment" losses.
Unfortunately...or not, we all be crazy!
People, humans, have a long history of doing the exact thing that is opposite of their best interests. Do we really think we got here by force? Manipulated, yes. Lied to, damned straight. But really, we KNOW when we are being lied to because it is always contrary to our common sense, to our instinct that anything too good to be true...isn't. But here we are anyway.
I can't wait to see how good of a liar we elect to run this mess next time. They will be a doozy I'm sure.
We have to recognize that the real threat is truth. It is the contageon that can spread through this 'economy" and bring it and all of its apparatchiks down. Praise be the "liar in chief".
I started kind of really figuring that out a few years or so back. I did a lot of homework, packed my bags, and moved as far away from people as I could while still reasonably maintaining modern amenities like electricity and flushing shitters.
All of these "bad decisions" are building up, higher and higher. My fear is that when it really hits the fan, global trade is going to roll over. After all, who can run a global trade business with 10% weekly moves in currencies? The world will then get a front seat to what Venezuelan's have been living with for a few years.
And there is no way in hell population is going to continue the Biryani ruler projections floated on this site not too long ago. Urban areas import vast amounts of food/water/energy to support the population DENSITY. If the food/water/energy interruptions are sustained, population DENSITY will go down.
I don't think this is going to be mad max type stuff, shit will just get more scarce and more expensive and it will vary quite a bit from country to country, city to city, etc. But, for sure, when this goes, it is going to be UGLY for a few years or more.
Buckle up!
Regards,
Cooter
More likely the walking dead.
Unthinking eaters hungry for anything alive. No they will not have much appetite for other walking dead.
Empty calories you know.
Living on acreage in a suburb of a very large metro area, I live in my own little world of delusion. I doubt there is really any safe place, only safe mental states that allow us to react in ways that preserve our lives rather than suicide actions.
I think I mentioned this before, but if you really want an inside peak at the psychology most tied to this sort of thing, Grossman's "On Killing" is a pretty interesting read.
There will always be violent criminal types, but they are not the norm in society. Get your head around that first, it changes how things look. If only 1 in 100 people is capable of preying violently on their peers, that is 99:1 against. Sure, people will be desparate, hungry, etc, but human nature isn't what we assume it is. People who are trained from youth to be violent are just that, but this isn't most of society.
No one can really know until we get there, just my take from what I could find/read on the subject matter.
Regards,
Cooter
Good take Coot. Things have to reset to become whole or potentially whole again. Kinda like surgery, if you need it just friggin get it over with so you can begin healing. I dont have offspring but the deeper in the mire we go the worse the next gens have it.
"I don't think this is going to be mad max type stuff"
But ruling it out completely could really be the last and largest miscalculations of our short lives
BULLISH!!!!!!!
BULLISHIT!!!
When do government profits fall .... has the Greek government dealt honestly with it's excesses .... of course dump on business .... always !
It's a market rigged by the Federal Reserve. What else can you say.
It's 0% rates and ever larger QEs.
QE4 late this year will likely be over $100 billion/month.
Each new stimulus round requires ever larger amounts of borrowing.
Agreed.
So does one get in/stay in now or wait until QE4 is announced, just in case the Fed does the right thing and stops QEs?
Personally I ran for the hills.
QE4EVA is a truish meme, but, only in the sense they can't stop it. This is sort of like the 18 year old male racing with a fast car. He can't stop it! Eventually they are introduced to Mr. Oak Tree and the gig is over.
If you aren't an insider, you are just gambling at a disadvantage. Invite some buddies over for poker instead. It's more fun AND it's an excuse to drink scotch,
Regards,
Cooter
Excellent point.
Since every division on the Fed Reserve QE pie chart is now marked "QE" the chances of the Headless Chicken dropping dead on a section marked QE is 100%
Dilution is the Solution right?
"So what happens to sales and employment when corporate profits start sliding?"
Wrong question.
The right one is: What happens to corporate profits when you squeeze wages so much (without a debt orgy) that sales start sliding?
Well, unless you buy into the stupidity advocated by Say's law that supply creates its own demand in a monetary economy of course...
Automation has offered cost savings to employers who can substitute it for living people. Unfortunately automation is not a customer, and as those displaced workers wages dissipate, so does the employers customer base. This substitution of automation for employment can only be sustained through redistribution, which ultimately is provided through debt. If welfare was not forcibly subsidized by producers, if debt was not used to provide spendable cash to otherwise penniless consumers, if debt was not provided to businesses who use it to buy automation, automation would not exist at a destructive level as it is today.
Our societal goal should be full employment while maintaining the least possible hardship. This cannot be sustained through debt and redistribution. It will collapse. If people were faced directly with the result of job loss or income reduction, the customer base would shrink immediately,balancing the economy, but debt and redistribution allow these imbalances to persist until reconciliation is a disaster, an apocalypse. This is where we are now.
"This is why I often post charts of financial data priced in oil or gold--real-world commodities that cannot be game"
^^ You lost me right there. If you think commodity pricing is immune from gaming, you clearly aren't paying attention.
Actually, you lost me when you wrote "Head-count has been slashed, suppliers have been squeezed, high-interest loans have been refinanced, under-performing stores have been shuttered, high-cost properties have been sold--there really isn't much left for Corporate America to slash and burn to skim more profit."
Slash and burn? Skim? Why the loaded terms? Either we believe a corporation has as one of if not the highest objective the obligation to maximize shareholder value or we don't. If you want to run a charity and spend on things you don't have to spend on and you want to aim for zero profit, by all means good luck to you.
Interesting that corporate profits and worker wages have both been flat for 25 years. More interesting is the fact that the CEOs, overpaid and clueless, never figured out the connection.
And for the last 25 years, I've told everyone I know to move to the country, find a place with a creek or stream, and learn to grown your own food. If you can't earn a living wage, at least you can survive.