Slide In Corporate Profits - Part II
Yesterday we posted a piece on the recent slide in the Year-Over-Year change in corporate profits as compared to the S&P 500. During a discussion with my friend Tyler Durden at Zero Hedge, Tyler gave me the brilliant suggestion to also compare the change in corporate profits to both the change in economic growth as well as jobless claims.
Tyler's insight was right on track as show in the chart. When corporate profits are overlaid against an inverted scale of jobless claims we find a very high correlation. What might be the explanation of this? As corporations get lean during a recessionary period profitability rises due to layoffs and cost cutting. Remember - the two biggest expenses to companies are healthcare benefits and labor costs. When they layoff employees those costs drop straight to the net income line. However, since the peak in corporate profits - companies have been slowing hiring again, unfortunately not to great degree, but enough to begin impacting profitability.
Secondly, when looking at profits compared to GDP we find, again, another very high correlation. With the economy weakening and consumer spending declining due to lack of wage growth, and now a decline in government support as well, it is not surprising to see a decline in corporate profit growth. With the consumer making up 70% of the current economic growth rate through consumption any impact on the consumer is going to quickly filter through to corporate profitability, and as we showed yesterday, stock market prices.
Finally, the evidence is mounting that corporate profits are under attack due to rising input costs through high commodity prices, weakening support from the consumer and an overall weakening state of manufacturing and employment completing the feedback loop into the domestic economy. While economists are still predicting just a slowdown in the economy before a reacceleration - my thoughts, as stated before, is that we will either see close to zero economic growth by the end of the summer or QE 3.