This is how the Federal Reserve and others want you to think of the US Economy.
Unfortunately, the only people that think the economy is like this are located at the Federal Reserve, and the media who continue to paint the rosiest of pictures.
The numbers behind the economic performance show that it is anything but a big smile.
How well do you remember the year 2007? This was before the economy imploded before “The Great Recessions”. At the end of the year 2007, Corporate Profits after taxes had fallen by 7.64% year over year, and for the fourth quarter of 2007, had fallen by 8.12% from the same quarter in 2006, indicating that things were getting worse. But we ignored the signals this was telling us. Why?
Non- farm payroll did not suffer its first negative month until February of 2008, and only slightly negative. There was a different performance of the jobs numbers during the Bush years with wide swings in both directions It was expected.
Profits beget jobs; Jobs do not beget profits. It’s a lesson that is not soon absorbed by the Federal Reserve and the Media. Had they real world experience, they would understand that unless you have the profits in the first place, you will not be able to hire additional employees for very long. We are already hearing the reports of massive job cuts in industries within the US. These cuts will continue to spread moving forward. And the overhead that comes today with a new employee makes businesses think long and hard before making that commitment.
Even government recognizes this. Here in Georgia, the State Legislature has been working to provide tax credits for companies that hire new workers in select counties. They are admitting it’s not cheap to add head count. Something the rest of us have expressed for years.
Fast forward to 2015, and Corporate Profits after taxes have fallen once again. This time by 5.13 percent from 2014. This would not appear to be as bad, but 2014 was also down from 2013. That is two negative years in a row. And this is occurring in a growing economy. How does that happen? What does an economy that is growing on the top line(GDP) but is shrinking on the bottom line(profits) tell us? Ponder that for a moment. What if in your own household you are grossing more income, but less is making it to your savings and investments? What would you do?
Making matters worse is that the fourth quarter of 2015 saw Corporate Profits fall a whopping 14.96% from the fourth quarter of 2014, meaning that the loss in profitability is accelerating.
What will Corporations do in this sort of environment? I believe that they will right-size their operations to return to levels of profitability growth that make it worth their efforts to expand.
These Corporations are not there to ramp up sales without seeing some of those sales make it to the bottom line as profits.
One thing is certain: The Federal Government is getting their share. They are recording record intakes of tax dollars across the board. And ObamaCare is having an impact, as well, growing faster and taking more of our money for medical expenses than we have ever seen,
Can we prosper in a profitless economy? As a capitalist I say no. All historical evidence points to no.
Is there anything on the horizon to suddenly drive profitability up for corporations? Look around. Taxes and regulations and Obamacare are taking their toll. There are no wage increases to eliminate because wages have been stagnant for years. Businesses have more or less cut their expenses to the bone over the last ten years.
There will be business failures again unless the Federal Reserve again steps in with more Quantitative Easing, which act as artificial profits within our economy.
What about the small businesses like the Mom and Pop businesses you are familiar with? For now they are barely holding their own. Their profitability has also been falling.
Combined with the Corporate profits on a weighted basis, however, we are sinking.
For the first time since the third quarter of 2009, the last four quarters have seen their profitability turn negative. The fourth quarter alone fell 6.14%.
Looking back at history, the combined performance turned negative in the 3rd quarter of 2007. I remember what happened after that.
The fourth quarter of 1998 was the last time we saw a negative number prior to the 3rd quarter of 2007. So this does not happen often and should be a warning.
The economic storm is coming. Pay attention and do not place your faith in the Federal Reserve. They will be the very last group to acknowledge we have a problem.
Update: The Atlanta Fed’s GDPNOW indicator was sliced down to 0.6% for the first quarter of 2016. This is worst than the fourth quarter of 2015. Do you think profitability is improving?
Anyone Who Says We Are Not In A Recession Is Peddling Fiction