Corporate Profits Vs. GDP: Not A Good Sign

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Includes: RINF, SPY
by: Constantin Gurdgiev

One interesting relationship in recent weeks has been flashing red: the relationship between annual nominal GDP growth rates for the U.S. and the reported growth rates in corporate profits for non-financial corporations.

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Source: Author own calculations based on data from Fed

As shown in the chart above, the growth rate in non-financial corporations' profits has recently dipped below zero, posting a -4.26% reading in 3Q 2015. The last time corporate profits took a nose dive was in 1Q 2014. Over the last four U.S. recessions, corporate profits' growth rates have been a relatively consistent lead indicator of troubles brewing ahead.

Things are not exactly on the healthy side. While two quarters separated by more than a year of positive data may be just a glitch, it is worth noting that since 1989 on, there has been no period in which a recession was not preceded by a decline in corporate profits, sometimes (1991, for example) as far out as 2 years ahead.

But you can take my word with a grain of salt, so here's Citi Index of corporate profits…

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Bloomberg's headline that accompanied it: "Global earnings downgrades haven't been this bad in 7 years".

Ah, the repaired world…