Deutsche Bank: The US May Now Be In A Recession

Tyler Durden's picture

Three months ago, we presented an analysis which showed something disturbing: according to Deutsche, the "current business cycle is already the fourth longest in the post- WWII period, and the corporate debt-to-GDP ratio suggests that imbalances are building", and that worse, as a result of soaring corporate debt and rolling-over profit margins, "a recession could hit as soon as the second half."

Overnight, and three months since its last such analysis, Deutsche Bank has published an update. It shows that, as illustrated in the chart below, profits per worker have generally trended higher over time. This is a function of productivity gains and inflation. However, this has changed in recent years.  "In the current business cycle, margins peaked at $18,752 per worker in Q4 2014. This compares to a ratio of $16,487 per worker as of Q2 2016. Margins have fallen because corporate profits have declined -6.3% annualized over the past six quarters, while private sector job growth over this period has been very steady at around 2.1%."

And before we get the usual "but... but... you must exclude energy" complaints (we wonder why: it is becoming increasingly obvious that oil is not going back to $100 so the new normoil may well be crude at $50 or lower, which means including all energy-related data), here it the punchline: it's excluded.

As of the latest sector-level data available through Q1 of this year, domestic profits excluding petroleum and coal products and Federal Reserve Banks were down -5.2% compared to a year ago. In fact, this series has been declining in year-over-year terms since Q2 2015. This means that recent overall margin compression has had less to do with the strengthening dollar and depressed energy prices, and more to do with weak domestic demand coupled with near-zero growth in nonfarm business productivity. From Q4 2014, when profit margins peaked, to Q2 2016, domestic profits have declined by a little less than $200 billion. As we can see in the charts below, this compares to a negligible $10 billion decline in profits from outside the US over the same period. Not surprisingly, the decline in profit growth has occurred alongside a deceleration in domestic demand. The year-over-year growth rate of real final sales to private domestic purchasers peaked at 3.9% in Q1 2015 and has since slowed to 2.3% as of last quarter.


So why are margins important? Because as we noted in our June note, margins always lead en economic contraction and always peak in advance of a recession: there has not been one business cycle in the post-WWII era where this has not been the case.

The reason margins are a leading indicator is simple: When corporate profitability declines, a pullback in spending and hiring eventually ensues. Thus far, firms have reacted to declining profit growth by cutting back on capital spending and inventory accumulation and have kept layoffs to a minimum. For example, real non-residential fixed investment has declined -0.2% annualized over the last six quarters. However, this has done little to stem the tide of margin compression because unfortunately productivity growth has been just 0.1% annualized over the same period, while unit labor costs are up 2.4%. This highlights a major risk that we see to the labor market at present: Nominal income growth continues to outpace nominal GDP, a terrible situation for corporate profitability.

In light of collapsing productivity, declining domestic demand, and sliding growth of real final sales, how has the US corporate sector avoided a full-blown recession so far? Simple: it has been loading up on debt to mask the income statement effects of declining demand. As DB calculates, the corporate sector has taken on a substantial amount of debt in the current business cycle. Nonfinancial corporate debt has increased by $4.5 trillion from its trough in Q4 2009 (the latest corporate debt data correspond to Q1 2016). As illustrated in the chart below, the ratio of nonfinancial corporate debt to nominal GDP is at its highest level since Q1 2009, when the economy was still in recession and nominal output was substantially depressed. Alongside tepid demand, the weakness in corporate balance sheets means that the Fed needs to be alert to any possible tightening in financial conditions, for one reason: based on nominal corporate balance sheets, the US is already effectively in a recession - the only thing preventing the hammer from falling are record low interest rates, keeping interest coverage ratios at all time lows.

So if the corporate balance sheet screams recession, what does the corporate income statement say?

Well, the average and median lead times between the peak in margins and the onset of recession are nine and eight quarters, respectively. This would imply...  the second half of 2016. To be sure, as shown in the table below, the time period between the peak in profit margins and the beginning of recession varies substantially across business cycles. Margins can sometimes peak well in advance of the onset of recession, as they did in the 1960s and 1990s business cycles. In the former period, the peak in margins occurred 16 quarters before recession. In the latter episode, the peak occurred 15 quarters ahead of the economy’s entering recession. Conceivably, such a scenario could unfold now. However, the current business cycle is already the fourth longest in the post-WWII period, and as we mentioned before, productivity growth has been abysmal. Hence, there is little cushion for the economy to absorb any negative endogenous shock. And, worse, as the chart above shows, with corporate debt-to-GDP ratio at recession highs, it suggests that imbalances have built up to the point where there is absolutely no capacity for tighter financial conditions.

Summarizing all of the above: based on corporate balance sheets and income statements, the US economy may be in a recession as of this moment... and if it isn't, even just one rate hike by the Fed, either in the September 21 meeting or in December, will assure that the backbone of corporate America, already straining under record debt and tumbling profits, will finally snap.

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restelle's picture

Just pull the freaking plug on this whole scheme.  Get it over with.  The sooner the better.

Kagemusho's picture

Damn straight. This is like letting a rabid dog still able to bite people run loose.  Call in Animal Control and put the fucker down, ferchrisake! 

Manthong's picture

US: Douche Bank likely dead broke insolvent and hanging on a thread

onewayticket2's picture

they will do precisely that....on Jan 21, if trump wins

bamawatson's picture

DB pays people to prepare that garbage ?

pathosattrition's picture

The US has been in recession since 2007. You have to remove federal deficit spending from GDP to get a real productivity figure, and the deficit has been larger than "growth" since 2009.

Escrava Isaura's picture


Deficit large than GDP growth started late 1960’s. By 1971 it was obviously clear. That’s why Nixon removed the gold standard.

Also, 1971 was when the crude-oil production peaked in the US. So, US no longer had the extra oil to grow. Then, US power realized that they would have to start importing oil soon, that’s was the main reason of the creation of the Petro-dollar in 1973 and US military expansion in the Middle East since then.



new game's picture

nailed it e.i. now we are entering the last gasp of air period; fracking where 25-30 percent energy to get a util of liquified trees. lol. we are in the desparation age, hence military madness subverted as spreading the word-democracy to peoples that want nothing but to be left somewhat alone worshiping their god.

if we the agressor, had left them to their own device and they became agressor, well then it is tyme to deal with it. but, we have made them the agressor in retaliation to invasion, walla, moar war for (oil) as act of desparation with many smoke screen reasons...

Infocat's picture

They pay people to write tons of shit like all major crime syndicates.

new game's picture

income up 2.4 percent, spending flat to slight decline; taxes and health care costs-duh. intrusion to the first degree, money taken b/4 labor unit gets to spend, then health care and geez, less to spend on apples and china shit after food rent and basics. geez, i'm an economist. lol.

forgot the graphs to impress you all-sorry...

Escrava Isaura's picture

Very narrow and biased post.

Private money is the main culprit.

Followed by private debt.

Then, the government.


new game's picture

ok, and where did that come from? agree that pyramid of money is bank centric, first touch with malinvestment. but when units of labor stipped down by taxes, ability of debt service is impaired. simply, correlated and exhausted of growth. moar producing less overall with debt ratio 3:1+, even nirp and zirp goes on so long as principle festers, eventually not serviceable...

Escrava Isaura's picture


Just want to point it out that, government actions are, say, antibiotics, but not the cause of the disease.

The problem lies on the ability of intelligent humans (the disease) to mutate, exacerbating the breaking  –resistance— point.

This minute video I find very telling:


Wile-E-Coyote's picture

German government telling citizens to store two weeks of food, today talking about mobilising the German army for internal security reasons. No such thing as coincidence. 

Manthong's picture

If der schmucks told me to do that, I would have to give away two or three months worth of provisions.

Manthong's picture

..and oh… how much ammo might one need to assure the capture of game including quail, rabbit, deer, bison and grizzly until the year 2020 or so?

auricle's picture

the malinvestment of buybacks are taking their toll. Little to no capital investment for 7 years. The only surprise is that it could go on for so long. 

undertow1141's picture

THe printing machine are finally smoking under the strain.

Escrava Isaura's picture

Not to worry.

Once the dollar fails, US will take by force.

But no currency has failed yet.

And the Dollar won’t be the first one.


new game's picture

yen and euro fighting a desparate battle to die first. but, never count the dolla out.

world heavy weight fight to die a fiat death of valueless value. all ponzies end the same.

just when? and i can't say, but it will be fast furious with no tyme to react. your worthless money will be frozen in tyme. all you and i will have is a skill set. and that will be my value to survival as mass madness ensues. no hollywood set needed. lock/load your helemet cam and walk the walk, i will be carefull, others will want what i have.


Escrava Isaura's picture

new game: it will be fast furious

I completely agree with that.


NG, I’ve be researching these issues for awhile. Pick dates are useless distractions because the meltdown will happen so fast, even if you could time it right, so what?

Focus on the domino affects. That matters.

So, we are at the first stage that is declining GDP, doesn’t matter how much debt and jobs you add.

Second stage will be financial collapse where all your money/savings are gone.

Followed by commerce collapse, where empty shelves and no gasoline will become the normal.


a) if the government is able to spend into the economy and/or manage to come up with a currency these two can be postpone for a little while.

b) self-sufficient communities, local self-employment and essential supplies, creating a Gift/Sharing Economy will be key here.


Fourth stage: Political collapse. Citizen unrest, surveillance society, scapegoating, rise in totalitarian governments, war and despotism.


Fifth stage: Social collapse. When self-sufficient communities are no longer self-sufficient.


Final stage: Humanity collapse.



WorkingFool's picture

Actually there are many prior examples of socialist states collapsing. USSR, Greece, Cuba, Venezula, Illinois . . .

The Real Tony's picture

Makes shorting stocks very easy just short the companies that bought back the highest percentage of their outstanding shares.

scribe1's picture

Corporations are in debt from reckless stock buybacks to justify obscene bonus levels for ceos. see: Stop the Fed before it kills again Mike Whitney

847328_3527's picture

Based on retail sales so far for September it looks bleak. The "robust recovery" has broke peeples.

Newsboy's picture

It's not a "recession" until everybody laughs if it's denied.

We're not there quite yet.

The Ram's picture

The US in a recession.  You don't say?  I wonder how much they pay the economists to come up with this feat of prognostication??

Colonel Klink's picture

It's coming.  If Trump wins, they'll pull it all down on him.

new game's picture

logical conclusion is to vote hillary then(lol), so we can keep the train from wrecking, lol.

but, i agree, the shit is headed fan centric with some velocity. the fan will be damaged, lol. 

Kagemusho's picture

I read something to the effect that Gore knew of the approaching recession/depression and didn't put up much of a fight regarding the election because he wanted Bush 2 to blamed for it as Herbert Hoover was in 1929.. It wouldn't surprise me.

AnngeloJamaica's picture
Deutsche Bank: The US May Now Be In A Recession

Does it really matter? if we are in one we are. if we are not then we all know its bullshit. so does it really matter?  

AnngeloJamaica's picture
Deutsche Bank: The US May Now Be In A Recession

Does it really matter? if we are in one we are. if we are not then we all know its bullshit. so does it really matter?  

RiverRoad's picture

Amusing.  Deutsche Bank's suddenly got religion!

dearth vader's picture

Not so much. They're seeking a plausible excuse for more lay-offs.

Escrava Isaura's picture

Because the banks want to liquidate (kill) the small business and the insolvent citizens, which will be most.

The Central banks want to raise rates to defend their currencies and to avoid civil disobedience by people that won’t be affording the basic things anymore. That’s their main concern which is the opposite of the private bankers.  


Arnold's picture

That explains NIRP programs perfectly./s

Be moderate in your alcohol intake.

Scotch should make you philosophize, not proselytize.

Escrava Isaura's picture

NIRP is a hoax/ploy. It’s to give an impression that the banks are trying to help the economy.

However, the banks don’t care about short term. The banks look at long term goals.

Second, NIRP kills the small banks/cooperative —competition. That is a bonus.

The ultimate goals are:

Liquidate the real economy, small banks, and just leave in place few players  

And move all the money, including social security, to Wall Street.


Supafly's picture

May be in a recession, as in DB may be insolvent?

Archive_file's picture

As in they'll get a bailout.

Wulfkind's picture we REALLY need these entrail readers to tell us what we have all known since the crash. The depression never ended. We just had a dead cat bounce due to 100's of trillions of printed global Central Bank bux and free debt to the banks for instant profits.

Colonel Klink's picture

Central bank bux, AKA juden fetzen.

Boomberg's picture

Yawn. The US has been in a recession/depression since 2008. 

redc1c4's picture

you saved me the trouble of poasting that truth...

Fisherman Blue's picture

I wish Jack Yellen would raise rates but I know it will never happen.

SenselessPanic's picture

why has not deutsche bank gone the way of lehman already?

Wulfkind's picture

Give it time. This kind of analysis is just Douche Bank telling their whores in government you need to QE us some free bailout money FAST ! We told you the recession/depression was coming.