Corporate Revenues Back To Low Point

by: Alhambra Investment Partners

By Jeffrey P. Snider

Going back to the snow debunking from earlier, the primary impediment to wider economic expansion outside of bifurcation and artificial monetary channels is income and employment. Mainstream commentary aside, employment has been mostly atrocious for some time. The clear divergence between the Establishment Survey and the Household Survey, both from the BLS, establishes that break in October 2012 - which confirms and conforms to the economic slowdown seen in a very, very broad section of data.

As for the reason employment has not followed the expected track, that is also relatively easy to pinpoint. To hire additional workers usually requires additional work. Companies, in every size category, have little to no revenue growth. Without revenue growth there can only be profit growth, the short-term focus of corporates in the world of QE intrusions, through over-emphasizing the management of costs. Companies that are forced to engender some small profitability growth without revenue expansion are simply not going to add to their largest cost item.

In 2013, this manifested as a slowing cash flow problem that has swung many businesses even further in the managed cost direction, leading to even larger imbalances between financial (preferred) and productive (can't do both) investment.

The appearance of revenue problems coincides with all the other empirical data, placing it right in the second quarter of 2012. While there is a multi-national flavor to revenues in the S&P 500 universe, it does not take much individual analysis to see that weakness is not just for Europe or Asia, North American results are just as troubling.

The fact that such weakness is extending for more than a year and half at levels far below 2008 should be a much wider concern, as it does not portend anything good for employment in 2014.

The only reason this has not turned into a mass unemployment event, as is usually the case in these recessionary conditions, is that corporations never "restocked" their labor utilization. Some (most) economists see that as evidence of productivity, but it is nothing of the kind. Instead, it is an obvious disconnect between economic statistics and actual money results. The weak revenues are much more sympathetic to the Household Survey's track of employment, and thus a much weaker view of the wider economy than the more adjusted accounts like GDP and the Establishment Survey.

So, once again, when revenues look like the above, incomes look like this:

Is it just coincidence that incomes began falling to recessionary levels in April and May 2012, or might that have been related to the dramatic decline in corporate revenues? For an orthodox economist, however, snow is far, far easier to implicate because it doesn't require throwing the economic textbook in the garbage.