Global Economics

Decline in Profit Margins and Investment Suggests Recession Due Now

A handful of chart by Albert Edwards at Society General suggests a recession is long overdue.

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

Recession Overdue

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).

Mish Comments

Thanks to Albert Edwards for an interesting set of charts.

Declining Profit Margins

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.

Mike "Mish" Shedlock

39 Responses

  • Realist

    Nov 8, 2019

    I will give you credit for persistence Mish. Eventually, there will be a recession. I will stick with my "slow growth going forward" prediction. The last 10 years have been 2%. The next 10 years will be closer to a 1% average, heading towards zero. Perhaps when growth stops you will be able to call it a "permanent recession".

  • numike

    Nov 8, 2019

    A report from Bisnow. “A strong jobs report, the stock market performing at record highs and low interest rates continue to fuel U.S. commercial real estate’s prolonged growth cycle. But overall economic growth has fallen as the year progresses, raising commercial real estate’s favorite question: How much longer can it all last? ‘I still, to this moment, don’t get it, other than there’s still a significant hangover from the financial crisis,’ Walker & Dunlop CEO Willie Walker said. ‘You’d think people would stretch lending standards, but they haven’t.'”

  • JonSellers

    Nov 8, 2019

    Corporate profit margins don't have the meaning they use to have. With government deregulation, corporations now hide their profits for tax purposes. Shareholder are rewarded with stock buybacks, not profits. What used to be profits are now debt payments to PE firms and banks.

  • Blurtman

    Nov 8, 2019

    Yield curve says no. It’s go-go!

  • Casual_Observer

    Nov 8, 2019

    We are back to slow growth levels under Obama which isnt surprising. That means low investment levels and slow growth.

  • Tony Bennett

    Nov 8, 2019

    "Interesting to see rise in corporate #profits in Q2: > profits rose $106bn in Q2 following $79bn decline in Q1" ... He tweeted that August 29th. Q2 profits since revised down to +$75.8 billion

  • Tony Bennett

    Nov 8, 2019

    "Together with the margin cycle, this is a loud warning signal of recession" ... The Brotherhood of CFOs desperately need a kitchen sink quarter (or 3). Low rates have allowed the lump under the rug to turn mountainous. Looking forward to what a good cleaning will bring out ...

  • Country Bob

    Nov 8, 2019

    A year ago when the yield curve supposedly inverted (due entirely to Fed manipulation), we were told that "proved" recession was unavoidable and GDP would be negative by early 2Q2019... guess these talking heads don't really have all the answers. Parts of the economy (California and northern cities with bloated bureaucracies and massive debt) are in recession, the south is growing gang busters (often with transplants fed up with big government up north). On average, the economy is growing 1-2% -- but lower numbers in government land, higher numbers in areas with more reasonable levels of government.

  • Casual_Observer

    Nov 8, 2019

    Here is the most recent GDP by state. The exodus from California is helping the desert southwest and Texas. The rest of the country is effectively sitting at < 2% GDP. Washington state is the Amazon effect that is helping the country too.

  • davebarnes

    Nov 8, 2019

    Société Générale and not Society General

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