Are We Entering an Earnings/Sales Recession?

January 12, 2016

Are corporate profits due for a retest of the lower channel line? If so, what happens to equity valuations when corporate profits plummet?

Is the U.S. economy in recession? Is it heading for recession? These questions can only be answered in hindsight, but it's worth looking for clues to what might be just ahead.

Longtime correspondent B.C. recently submitted a chart of corporate earnings and one of real demand and time deposits (a measure of money) and real final sales.

(Explanation of demand deposits).

Unsurprisingly, all three of these metrics tank in recessions.

Corporate profits have been hugging the upper line of a long-term channel for years.

While real final sales have not yet plunged to recession levels, the annual change in real demand and time deposits has fallen into negative territory.

While the annual change in demand and time deposits has swung between positive and negative for decades, the annual change in real final sales only enters negative territory in recessions.

While the two series don't align perfectly, there is a clear correlation between the expansion of money supply and sales.

For this reason, the recent decline in demand and time deposits might serve as an early warning of an impending drop in real sales to recession levels.

Corporate profits have remained in a rising channel for 85 years, with one exception: the Global Financial Meltdown of 2008-09.

Interestingly, all three recent equity bubbles--in 2000, 2007 and the current bubble--align with corporate profit peaks above the upper channel line.

Are corporate profits due for a retest of the lower channel line? If so, what happens to equity valuations when corporate profits plummet? These questions may be answered later in 2016.

Admin note: I will be busy with family commitments this month. As a result, blog posts will be sporadic and email responses will be near-zero. Thank you for your understanding.

My book on the emerging economy is now available as an audiobook: Get a Job, Build a Real Career and Defy a Bewildering Economy (Audible.com).

My new book is in the top 10 of Amazon's Kindle ebooks > Business & Money > International Economics: A Radically Beneficial World: Automation, Technology and Creating Jobs for All. The Kindle edition is $9.95 and the print edition is currently discounted to $20.82.


NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, Brian R. ($50), for yet another splendidly generous contribution to this site -- I am greatly honored by your steadfast support and readership.

 

Thank you, Glenn L. ($10), for your most generous contribution to this site -- I am greatly honored by your support and readership.




Discover why Iím looking to retire in a SE Asia luxury resort for $1,200/month.



Error: Embedded data could not be displayed.