America: jobs, profits and the stock market

Bank of America Merrill Lynch (BAML) analysts have actually cut their S&P 500 earnings forecasts to reflect no growth on 2016. JP Morgan notes that there is historical precedent for this: “Over the last ten years, the consensus growth estimate for the following year was typically revised down by ~5%… The downwards revision is expected to be even more pronounced for 2017 due to “unrealistic assumptions,” such as “7% sales growth and +50bp margin expansion.”
In a special report, JP Morgan economists warned that the US and global economy was heading for a fall. The reason? Falling profits and profitability! JPM said: “profits—alongside equity prices — have declined over the past four quarters, and global investment spending has moved in lock step with the disappointing pace of profit growth this cycle. There is a significant risk that a substantial drag on corporate spending remains in the pipeline.”
The report then referred to the global situation. “Perhaps the most telling sign of the global nature of the profit growth slump is the fact that the concentration of earnings growth around the world has reached its highest level in at least two decades, surpassing even the large concentrated hit to earnings during the global financial crisis.” In other words, what profits are being made are concentrated in just a few countries and a small number of companies.
JPM summed up the dilemma “The key question is whether the latest downshift in profit growth marks the beginning of a recession dynamic or simply reflects a temporary soft patch amplified by the commodity price plunge that has hit related earnings… Without a recovery in business confidence, it is hard to imagine a turn up in capital spending, and it is increasingly likely that the next leg down will be from a pullback in G-3 hiring.”
So unless profits pick up, investment will decline and, with it, employment, in the US and elsewhere, engendering a new global recession. At the moment, profits are static globally, along with global investment. The June jobs figures in America may be the last hurrah for this weak economic recovery.

Michael Roberts Blog


US stock market prices headed back towards all-time highs on Friday after the data on the increase in US jobs were released.  There was a sharp increase in net new jobs of 287,000 in June, much higher than expected.  Financial pundits reckoned that this showed the US economy was not heading into recession after all.  Instead full employment was approaching, wages were rising and things were looking better – contrary to the doom-mongers.

But a closer look at the jobs figures makes that conclusion somewhat suspect.  First, the previous month’s job figure, which showed only a rise of 38,000 in net jobs, was revised down to 11,000.  And taking the average of the last three months reveals that the monthly job growth was only 147,000.  Investment analyst, David Rosenberg, pointed out that job growth has been slowing down…

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