Director's Cut: Corporate Profits Are Up, but Will It Last?

Just-released Corporate Profits data shows that Corporate Profits (with capital consumption adjustments) are rising after reaching a low in March 2019. The decline in March was not unexpected, as Corporate Profits had also declined throughout the fourth quarter of 2018. What was somewhat unexpected was just how strong Corporate Profits came back in the second quarter of 2019. Corporate Profits during the recent quarter rose a stronger-than-normal 5.3% from the prior quarter, bringing the annual total to $2.113 trillion – the highest level of Corporate Profits in four years.

This all sounds like good news and a reason to be excited and optimistic about the future. However, we can’t just look at one quarter's worth of data and assume the good times are going to last. The immediate question you need to be asking yourself is how long will this rising trend last? If this rise in Corporate Profits is sustainable, you are going to plan very differently for 2020 than you would if Corporate Profits were going to decline again.

Red flags that suggest the Corporate Profits rising trend is not sustainable are appearing in the leading indicators and in the Corporate Profits data itself.

1. The US Stock Prices Index – The stock market is rising but has generally been on the back side of the business cycle for a year and a half. During the second quarter, the 3/12 trend bounced up, similarly to the Corporate Profits trend, but has since come back down.
2. The G7 Leading Indicator – The Indicator is in Phase D, Recession, and has been moving through cycles with Corporate Profits for nearly 30 years. The ongoing decline in the global economy, as illustrated by the G7 Leading Indicator, suggests there is more downside pressure from the global economy that is going to hinder profitability in the US.
3. The Corporate Profits 3/12 – The Corporate Profits quarterly growth rate, or 3/12, declined from September 2018 through March 2019 – six months. If the declining trend were to end in March 2019, it would mark the shortest length of decline for Corporate Profits in over 50 years. For the last 50 years, when the Corporate Profits trend has declined, it has fallen for a minimum of 12 months. This suggests that the overall decline in Corporate Profits will persist until at least late this year.

If your business trends with the macroeconomy, build your cash reserves from the increased profitability of the second quarter to help cushion the back side of the business cycle into 2020. The cash reserves will help you prepare your company for the next Phase B, Accelerating Growth, trend in the second half of 2020.

Jackie Greene
Director of Economics