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Five Of The Past Six Times Corporate Margins Have Plunged This Much, Ended In A Recession
While increasingly more economic indicators suggesting the US economy is dramatically slowing down (confirmed just last week not only by a truly terrible payrolls report but also by the Atlanta Fed cutting its Q3 GDP forecast from 1.8% to 0.9%), and the word "recession" being ever more casually tossed around, there has been little actual empirical work done to correlate what matters most for the business cycle - the current state of corporate profits - to the broader economic cycle, i.e., can corporate profits time the next recession?
Overnight Barclays did just that. The bank analyzed the link between profit margins and recessions for the last seven business cycles, dating back to 1973. In its own words: "the results are not encouraging for the economy or the market."
As Barclays notes, profit margins have declined 60bp in the last 12 months to 8.5%.
It then ominously warns that declines of this magnitude are rare when the economy is not entering or in a recession. In fact, in the last 40 years it has only happened once.
More from Barclays:
Figure 2 illustrates the link between profit margins and recessions for the last seven business cycles, dating back to 1973. Figure 3 adds detail by providing a summary of what happened the other six times profit margins declined 60bp in a 12-month period. The results are not encouraging for the economy or the market.
The profit margin decline in 1980 was a signal that the economy had not recovered and a double-dip recession occurred. In 1990, the decline in profit margins predicted a recession and a large decline in the S&P 500. In 2001 and 2008 profit margins fell as the economy entered recessions. This preceded substantial declines in the S&P 500. 1975 was different because profit margins fell after the economy exited a recession and the S&P 500 went up during the subsequent six months. Note that in every period, margins continued to decline.
So on 5 out of 6 occasions, or a 83% hit rate, a 60% plunge in margins as has happened now, resulted in a recession: hardly a ringing endorsement for the future of economy. The one outlier, however, is Barclays' (which does not currently "expect" a recession) saving grace: it is the case of 1985 when margins drop due to a plunge in the energy sector. To wit:
1985 stands out among these examples. In this period the economy did not enter a recession. In fact, the S&P 500 staged a material rally, increasing 21% in six months. This is noteworthy because there are similarities between 1985 and 2015. Most importantly, the decline in profit margins was caused by the energy sector. In 1985, profit margins for the energy sector collapsed as oil prices began a 60% plunge. But, outside of the energy sector profit margins were stable. Similarly, the drop in profit margins that has occurred in 2015 is primarily the result of lower margins from the energy sector, once again due to falling oil prices. Perhaps a decline in profit margins is a less reliable signal for recessions when it is caused by the energy sector because lower oil prices are good for the economy.
Ah yes, but as Barclays accurately points out, the drop in 2015 has been "primarily" as a result of the energy sector. The problem is that with every passing day, more and more sectors are also impacted as can be seen on the following chart showing the Y/Y consensus change in Q3 EPS: while energy sticks out, now more than half of all industries are poised to drop...
... which is no longer just a function of the crashing commodity complext, but more a function of the soaring dollar which is impacting increasingly more, especially multi-national, companies. As such with every passing day the parallels to 1985 become weaker. And finally, let's not forget that the current "business cycle" is anything but: courtesy of ZIRP and QE, corporate profits are artificially boosted due to record low interest expense. If and when the rate hike cycle finally kicks in, that's when companies will finally have to start factoring in interest outflows as part of their declining EPS, something Barclays has completely ignored forgetting there has never been as artificial a "business cycle" as there is now.
To summarize Barclays' thinking, the bank says "profit margins have declined by 60bp in the last 12 months. This has happened before. Since 1973 there are six other examples. In five out of six, the decline in profit margins coincided with a recession. The one time it did not was in 1985. But, 1985 resembles 2015 because the decline in profit margins is primarily the result of lower oil prices." ... but is increasingly the result of a soaring dollar, something which won't change if other central banks expand their quantitative easing programs while the Fed remains on hold.
Finally, here is Barclays' - which, again, does not expect a recession as of right now: once again Goldman will have to take the Penguin lead on that one - flow chart of how to tread from here on out, at least until the NBER does admit that the US is in a recession.
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It's nothing that importing a few million low income migrants won't fix. /snark
Lots of liberal mayors are screaming for terrorist refugees.....I guess they think it will liven things up.
Lemme guess...Since LEHMAN?
It's different, since Lehman.
We need to take language back by using it accurately. What you call "liberal mayors" are actually Debt-Money Monopolist programmed and financed political operatives.
Call them what they are - Debt-Money Monopolist political operatives - Democratic style.
The same is true of Republicans. They are Debt-Money Monopolist political operatives - Republican style.
I'll work on the names to make them more eloquent, but you get the idea.
THESE PEOPLE DO NOT WORK FOR ORDINARY CITIZENS. THEY ARE CONNING ORDINARY CITIZENS FOR THE BENEFIT OF THE DEBT-MONEY MONOPOLIST "BIG CLUB."
Left-wing politicians love it. They'll make it add to the GDP when they go on welfare and have more voters,
What the left-wing politicians don't understand is the refugees want to kill people like the left-wingers because their lifestyle is against the refugee's religious law.
Every man his own cult, tick tock motherfuckers!!
Barry's push to import thousands of aggressive angry unemployable unskilled refugees is all part of their plan to continue to destroy America's middle class, what's left of it anyway.
http://www.pepsico.com/docs/album/Investor/q3_2015_pep_infographic_ao68t...
fine print...yup.......eps-73%
Yea, but it is a great looking comic book!
"How about a Fresca!!"
At this point, what does it matter? The zionists have pushed all their chips into the pot and are going to ride this sucker until it drops... They will print, obfuscate, lie and manipulate their asses off to save their phoney-baloney jobs and stream of $$$... The world's economic system is like a giant house of cards and we are just waiting for the stiff breeze...
The only question remaining is who will plant the flag over Tel Aviv. Hammer and sickle or red cresent?
Actually, the Debt-Money Monopolists won't print forever. That's the narrative, but like almost every other narrative, IT IS FALSE.
When a group has control over the money system and controls trillions of dollars and trillions of debt instruments, why would they print their own wealth into nothingness?
Because they are stupid, right? WRONG.
They rule the world like the machines in the Matrix ruled over the Matrix. The write a propaganda program, feed it into the Matrix, and 99 out of 100 people parrot the program like it was gospel truth.
Pretending inferiority is a Sun Tzu Art of War tactic - but who has time to read Art of War for understanding, right? The oligarchs do!
They didn't hyperinflate in the 1930s and what happened? They asset strip the Muppetry of their monetary wealth, their farms, their businesses, their land, etc...
They made out like bandits BECAUSE THEY ARE BANDITS.
The Fed is a corporate front controlled, ultimately, by the same people who control the mega-banks - the Debt-Money Monopolists.
Yellen is a schmuck like Soetoro. They are front Muppets. They do what they are told or the Debt-Money Monopoly controlled military complex, black ops division, will "magic bullet" (or similar) and the Muppetry will go along with it like they always do.
When nation states start defaulting on debt, INTEREST RATES WILL RISE. This is all part of the Debt-Money Monopolist plan to asset strip you and yours.
Only an uninformed person thinks the Debt-Money Monopoly is going to bail them out of the debt that was criminally used to enslave them in the first place.
The "printing" isn't even "printing" for society. It is a looting operation. The bankrupt mega-banks get trillions in money and society gets trillions in debt owed back to the bankrupt banks WITH INTEREST.
And people think they are stupid? No, people who think they are stupid are the stupid ones - believing the false narratives that was "programmed into the Matrix" by the criminal Debt-Money Monopolist oligarchs.
And it will this time too! Hiring slowing down already. Layoffs beginning again.
The numbers are fictional. The depression that started in 08/09 never ended. Earnings are out of wiggle room accounting tricks.
Stock buy-backs going since 2008 with the Fed's cheap money. When it ends, and it has to, it will end in a world of hurt.
deutsche bank sees a problem with current CBank policy..enjoy
"The kicker from Deutsche Bank, which as Bloomberg's Luke Kawa characterized basically makes the entire post-crisis central-banking project all for naught, is rough:
While a number of arguments can be made for why countercyclical monetary policy in the US through lower rates is supportive of economic growth, the encouragement of a lower savings rate (higher consumption rate) is not one of them. Indeed the empirical evidence is strongly to the contrary: lower rates look to be lowering the consumption rate and lowering aggregate demand."
WHAT A FARCE
How many years did it take them to 'understand'?
Any second year economics student couldof toldcha
we don't need no steenking profits. we have old yeller. bring on earnings season. the good the bad, and the ugly. our eCONoME is strong. /s
It doesn't matter if we enter a recession or not. In fact, if we do enter a recession, expect the market to go up more than if we don't.
Way to go Yellen...you have completely destroyed our entire financial system, but thanks for the $0.12 I earned last month in my money market account. That will come in handy for a 5-minute parking meter fare.
You earned $0.12? SWEET!
Captain of Titanic says clear sailing....we are invincible.
I'm am looking forward to moving out of this depression and into a recession. I think that's a bit better, a step up, yes?
For the average working person, the US economy has been in the tank since the 2008 financial crash. US taxpayers have provided $ trillions to (still) insolvent banks (QE). This money has inflated the stock market and real estate in SF, Boston, NYC, etc and de-stabilized emerging markets. Indeed, the economic “recovery” has benefited the wealthiest segments of US society. > 90% of “new” jobs are temp positions- low pay, no benefits, zero job security. How can the US economy grow when the purchasing power of working people is being continuously eroded (read slack demand)? The financial geniuses at the FED, BOJ and ECB believe that you can cure economic ills by throwing lots of taxpayer money at banks. We have seen the results- the US, EU and Japanese economies are confronted with structural economic stagnation and decline, which may well end up being worse than the Great Depression.
yet everyone has new cars, clothes and iphones. Im starting to understand people can get far less- job security, pay, benefits, retirement and still be complacent lil spenders. No money, no problem, just get more into debt. Its what the govt is doing, so when in rome.
You mean corporate profits matter in an age of buying back stock to boost EPS? Even I, a punk ass idiot, know that profit is important if not critical! Or...is it? Please Mr. Cramer, enlighten us.
Guess we could change the accounting rules again?
Back in olden days none of had the information at our finger tips. I'll wager 95% of the folks here had the ability to get the amount of information in a month that we now get on one page at ZH.
This makes it much harder for the reassurances we get from CNBC etc. to give us peace.
In other words, this time everyone who cares to know is watching and very little can be hidden, not only from those active in the market but from the population as a whole.
While many people do not even know what QE is, a huge number do. It will be interesting to see how this episode will be explained as we watch our economy die.
Looks like Barclays is at it again with an ill-thought out assertion. Perhaps all their best analysts are busy manipulating the gold market. To pick an arbitrary decline of 60 bps that fits the desired narrative is careless, but the fact that they are using a nominal amount as opposed to a relative amount is inexcusable. Look at that chart, anyone decently versed in technical analysis can see a change in range that occured with the dotcom cycle. What we see now is higher natural levels of profit margins, and although that analysis may lie in a vacuum to monetary policy, it seems that in recognizing that fact one would classify the key reversal on a relative basis off the highs. For instance if profit margins hit 6%, a reading following that of 5% would indicate a 20% decline in profit margins. In classifying the threshold at this level, I believe you may attain a more meaningful assertion from the all time high profit margins of this cycle.