If you have been following my work for some time, you know that I have expressed belief that there is a strong correlation between Corporate Profit Growth and job growth in the United States.
My research had shown that there was a very high correlation between those two numbers. The higher the profit growth year over year, then the higher the job growth 4-5 quarters later.
Have a look at the following data. We have higher job growth with profit at lower levels? What is wrong with this picture?
Sep-10 -29.11% 0.09%
Sep-11 32.94% 1.66%
Sep-12 6.55% 1.48%
Sep-13 11.77% 1.79%
Sep-14 1.10% 2.04%
Sep-15 1.89% 2.05%
Profit Growth % from previous year
Job Growth % 4 quarters ending date shown
At the time I discovered this relationship, the correlation was .91 or so. This would imply that 81% of job growth was related to profit growth. And as I have written and suggested to anyone that would listen, if you wanted more job growth, you enabled more profit growth in the business sector. Using the same time frames as before, I watched the correlation fall from .81 to .57, suggesting that only 32% of job growth was now due to profit growth. Disappointing to me to be sure, but it was still a positive correlation
The jobs added monthly in the Non-Farm Payrolls report began to show some unusual patterns in job increases. Part of that could be attributed to the move from more part-time jobs being included in that number than the US has historically produced.
Looking at the jobs report became a bit more like looking at “Apples to Oranges” rather than “Apples to Apples”. As time progressed, I knew that impact would slowly become less of a factor.
So, I have watched Corporate Profits on a steady path of decline, job creation stay higher than expected, and knew that not all of it could be attributed to the move to more part time jobs being included in the count.
What would possibly cause the results I was seeing? Quantitative Easing.
My theory is that Quantitative Easing in the equivalent of injecting artificial profits into our macro economic system. All of the things that QE money has been used for such as buying bonds and CMOs would have only been able to be purchased out of either salaries or profits otherwise. Therefore, they are like artificial profits added into the mix.
Quantitative Easing 1 started in earnest in the beginning of 2009. QE 2 in 2010, and QE 3 in September of 2012. If Quantitative Easing was having an impact to jobs, would I see that in the numbers if I only looked at the profit growth and job growth numbers since the onset of QE1?
Modifying the time frame to the last five years(concluding with the NFP Jobs report released on 10/2/2015) the correlation has changed drastically, and turned negative, coming in at -0.49.
What does this information suggest to me? That we have redefined what level of profit growth is needed to support job growth. However, that job growth has relied heavily upon QE to give us even mediocre results.
The Federal Reserve has a big problem. Raising rates negates the impact of QE. The impact of QE is fading anyway, despite every dollar used for QE plus the interest earned, as been rolled over and reinvested. QE actually never stopped.
What is left in the arsenal of Central Planners and Bankers to do?
How’s that song go? “War- What is it good for?”
It just might be their only tool left in their bag.
Plan accordingly. As I said this summer, this is not going to be pleasant.
The following story on Zerohedge supports my observations from Former Chairman Ben Bernanke pushes his book on how he saved the world. While I do disagree, it is good to know that I did correctly identify what caused the drop in correlations and did identify why.