The following snips are courtesy of Albert Edwards at Society General
Unit Business Costs and a Profit Squeeze
Aside from payrolls, the economic data has certainly been lukewarm. So that rapid payroll growth spells dire productivity growth. In short, the sharp 3% jump in unit labour costs in Q3 is crushing corporate margins (chart shows inverse).
Our US economist Steve Gallagher shows below that, if history is any guide, a recession is due just about now. Yet investors fear of recession has all but evaporated.
Extent of the Margin Squeeze
Regular readers will know that we have long believed that it is the business investment cycle that ‘causes’ recessions, in an accounting sense. The chart below shows the contribution of business investment to GDP growth. Although in an economic recovery business investment contributes a fraction of GDP growth, in a recession the dotted line totally overlays the red line – business investment ‘causes’ recessions.
Recent weak core durable goods orders confirmed what the latest Q3 GDP data also suggest: business investment has begun falling. Together with the margin cycle, this is a loud warning signal of recession (the false signal in 2015 was due to the collapse in shale oil and confined to only one sector).
Thanks to Albert Edwards for an interesting set of charts.
Declining Profit Margins
— Gregory Daco (@GregDaco) August 29, 2019
Another fun fact.
Recent years have seen a decline in corp profit as % of GDP (I don’t have the post-revision numbers yet) as well as a decline in average corp tax rate.
Weren’t the lower corp tax rates supposed to boost corp profits??? pic.twitter.com/WLxSHkut8O
— Asif Abdullah (@Asif_H_Abdullah) August 29, 2019
Rise in Employment Costs
I discussed the rise in employment costs yesterday in Labor Productivity Dives as Unit Labor Costs Soar
10 Reasons for Declining Productivity
Earlier today I gave 10 Reasons for Declining Productivity
Fed-sponsored Zombie corporations, debt, government spending and demographics are among my reasons.