Why Hitting 2% Real GDP Growth Is Key For US Corporate Profits

Tyler Durden's picture

Submitted by Eric Bush via Gavekal Capital blog,

While the myth that stock market returns are highly correlated to a country’s GDP growth rate has largely been debunked, there remains a strong, and intuitive, relationship between corporate profits and GDP. GDP measures the output of an economy and corporate profits are simply the income to capital owners derived from that output (with some accounting adjustments made along the way). In the long-run, equity investors need to see growth in corporate profits in order to justify equity prices.

In the table below, we summarize the YoY change in before tax corporate profits (with IVA  and CC adjustments) by various real GDP growth rates.

We are using quarterly data from the NIPA accounts from 3/31/1947-9/30/2016. Let us explain what the table is illustrating by looking at an example. For instance, when the YoY change in real GDP growth is between 1% and 1.5% for any given quarter (we have had 13 such occurrences since 1947), corporate profits on average have increased  by a little more than 1% on a YoY basis. Additionally, we have calculated a profits “beta” by taking the growth rate of corporate profits divided by the growth rate of real GDP and highlighted every instance where the beta is above 2x. The point of this calculation is to show how important real GDP growth is to corporate profits. 

When the profit beta is higher it means that the business community is able to squeeze more profits out of every dollar of GDP growth. This is why 2% real GDP growth is a key point for the US economy. When real GDP growth is between 0.5%-2%, the average profit beta is just 0.12x and the YoY change in corporate profits is just 1.05%. However, when real GDP growth is between 2%-2.5%, the beta jumps up to 2.36x and the YoY change in corporate profits increases to 5.33%. This is more than double the YoY% change in corporate profits when the economy is growing at just a bit slower growth rate between 1.5%-2%. When the economy is growing by over 2% and profits are growing by at least double that rate, the market should feel much more comfortable with the future and will most likely apply a higher multiple to current profits.

That is a configuration that all equity investors should like.

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PoasterToaster's picture
PoasterToaster (not verified) Feb 17, 2017 1:18 PM

Is Google a corporation?

Soul Glow's picture

When considering P/E Google is about half a company.  AMZN is 1/10th of a normal company.

Soul Glow's picture

Let's spend a minute and think about the existing short silver trade, one which has been in affect for a long time now.  These positions are sitting on silver and piling in at the low end of the price.  Why?

How could a trader look at silver and think, "Gee, I could make so much money shorting silver!"  The price - via a techinical chart - could go back to $15.  Sure it could (and I would love it as I would buy a lot of it there).  But how much further down could it go?  The floor appears to be $15.

And the upside?  Well it could go back to it's midrange price which we could say is $25 very easily.  It was just at $20 a few months ago, and with inflation ramping up and Trump bearish on the dollar why not?  So this begs the question, what are traders thinking shorting silver here?

This is a case in point of the manipulation scheme.  It doesn't take much logic to figure out there is not much to gain financially shorting silver here.  Obviously it is to keep the precious metals from rivaling the fiat currency system.

Sonny Brakes's picture

Why, if the dollar is doomed, do people still wet their pants when they're favourite precious metal rises in value quoted in the very unit they no longer have confidence in?

tripletail's picture

GDP isn't even calculated correctly. So what's the point? Oh, I get it --- the relationship between falsified corporate profits and GDP. /s

adr's picture

But what if GDP is rigged and the supposed growth doesn't exist and anywhere between $12 and 15 Trillion of GDP is essentially created out of thin air existing only in the minds of corporate accountants and government bureaucrats?

Ask yourself, Does it feel like the USA is outputting more than double what the economy was in the late 1990s? GDP in 1998 was $9.8 Trillion. Prior to the "Great Recession" it was $14.8 trillion. We really added $5 trillion in output in ten years? The entire output of the USA in 1988 added on top of what was produced in 1998. Really?????

Now we supposedly have a $19-20 Trillion economy????? Two 1988s on top of 1998. During the entire destruction of the domestic manufacturing and main street sectors of the economy, we added $15 trillion in GROSS DOMESTIC OUTPUT!!!!!

GDP went up by $15 trillion during a period where people's income and the labor participation rate dropped to a time when the GDP of the USA was $2.5 trillion.


Could it be that GDP is inflated just to keep the massive debt burden the US government has generated look like it is in check?

Fuckbama more than doubled the national debt in eight years. Cockbush doubled the debt during his time as well. Somehow GDP kept up with the outrageous government spending. Sorry just not possible.


Tlön Uqbar's picture
Tlön Uqbar (not verified) adr Feb 17, 2017 2:31 PM

Nature wastes nothing.

Try explaining GDP to a squirrel or a Sumatran rhino.

Economics is the afterbirth of people exploiting other people of their land, natural resources, food, shelter, and energy. All in all, humans have proven remarkably adaptable to such changes within a generation or two.

All in all, the ability to exploit a larger number of people and geographies is what we call growth. When the available exploitable geography and people diminishes because of prior corporate claims, debt is created to replace non-renewable human enslavement.

The entire idea of equilbrium, profit, benefit, and growth in the current econimic models are impossible. Once the terminus is reached it's time for a centralization fo power in ever greater geographies.

This is due to the fact that the few cannot possibly profit over the many with the current laws and technology. If you extract everything from your domicile then you have fewer resources, including laborers. It becomes impossible that your labor and your resources and your technology balance. The idea that GDP is linear is foolish.

I agree with you adr. It's all bullshit. Just keeping a standard of living, which is a reach around to saying to keep getting what one is deserved over and above the Natural order, or what most people have, or to keep strung out is the microcosm.

If tomorrow one could paint a house without paying the state or one could produce goods and services without paying taxes one's labor and one could buy and sell without a 10-99, hold cash, own property, the system would not be eating itself. But that's not the case. Usury and debt and GDP and Corporate profits and priveleges with state and statutory regulations and penalties and taxes and whatever prevents any possibility of natural law because a few people want it that way and will shoot you if you have a beef.

Just remember that corporate profits begin with how your children are educated or un-educated and welcome to the real world.

ejmoosa's picture

Profits drive Real GDP growth, not the other way around.

Government spending more money, driving up GDP, will not lead to higher corporate profits.

Corporate profits after taxes is most important as well.