Despite Yellen’s best efforts today to basically dismiss any and all data as irrelevant going forward in The Fed’s decision-making process, we suspect all eyes (and algos) will be firmly glued to this week’s payrolls’ data. Will it be another record month for Obama to crow about? Will Mark Zandi do the “told you so dance” to all the trump supporters who seem less exuberant about the recovery? One look at this chart – and the disastrous trend – and we suspect, sooner-rather-than-later, the fecal matter will be striking the rotating object in America…
As Bloomberg notes, a growing gap is developing between corporate profits and job growth in the U.S.
Company earnings, a key driver of business spending and employment, tumbled in the fourth quarter and history shows that when they retreat, the economy often follows.
So we wonder just what kind of seasonal-adjustments are being used to ensure this gap remains. Notice the “gap” in 1999… that did not end well.
BofAML’s Michael Contopoulos adds that it is no surprise that falling corporate earnings is a leading indicator for economic recessions – when corporates struggle to grow their bottom lines, they are forced to source liquidity through either the capital markets or cost cutting methods. And when funding either becomes unavailable or too expensive, companies must scale back through capex and/or personnel reductions.
Although a US recession is not a necessary precondition for a turn in the credit cycle, but matters only so much as its influence on the shape of the next wave of defaults, we still look closely at how macroeconomic factors could affect corporate health. And it becomes concerning to us that after a 2nd consecutive decline in year over year corporate earnings, coupled with a lack of worker productivity and higher wages, that soon the very rosy jobs numbers may begin to disappoint.
With personal spending increasing by a paltry 0.1% for each of the past 3 months, we believe consumer spending habits are already more conservative than they should be given low gasoline prices and currently favorable employment statistics. Should jobs numbers begin to disappoint, in our opinion consumers would be quick to pull back and save more of their income.
Even a marginally weaker spender could have a substantial impact on the most vulnerable companies, forcing these weakest links to liquidate, fire and default. The potential for this added labor slack could lead to a further pullback in consumer spending and produce stress within the next weakest links in the chain. This self-perpetuating cycle, should it continue, could create a rolling blackout as defaults migrate from one sector to the next. And while Energy and Materials are currently in the crosshairs, we could envision a number of sectors that could come into focus and prove unable to withstand the added stress of a weaker consumer.
To this end, we believe more attention should be paid to the current fundamentals of US corporates and the vulnerability of what are now considered ‘healthy’ high yield sectors to a wave of defaults that has the potential to spread into all industries. Although technicals are currently keeping the market afloat, we are not buyers of the market at current levels and believe fundamentals will ultimately force spreads wider.
