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Corporate Profits – Hinting At Recession

Written by admin | May, 26, 2013

corporate-profits-vs-gdp-082611The Bureau of Economic Analysis released the latest data on corporate profits for the second quarter that grew to $1.1.467 trillion annualized.  This is up from $1.455 trillion in the fourth quarter (which was revised DOWN from the previously estimated $1.476 trillion).

Corporate profits are unchanged on a year-on-year basis, compared to up 2.8 percent in the first quarter. Growth in profits is extremely volatile over recession/recovery periods and is slowing from the spike in late 2009 and early 2010. The recent peak in year-ago growth was 115.9 percent for the fourth quarter of 2009.

The important point to note here is that that annual rate is SLOWING.   While analysts keep insisting that profits will continue to hit new records history suggests otherwise.  In the chart you will see the year-over-year changes in corporate profits going back to 1947.   Leading up to, and including recessions, profits of companies decrease as the business cycle goes from recovery to maturity to decline.  

When corporate profits begin to slide into negative year-over-year territory it is usually in concert with the onset of a recession.  Since 1947 slides of corporate profits into negative territory have preceded or coincided with a recession 11 out of 15 times or 73% of the time.  In other words, the odds are heavily stacked against the economy not sliding into a recession in coming months.

This data combined with the weakness in the manufacturing data as of late, GDP and a variety of other indicators point to economic weakness ahead.  For investors it will become critically important to continue to hedge investments, reduce overall portfolio risk and seek income as opposed to capital appreciation for portfolio returns.

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