Recession forecasts in the United States are like the dial on a radio. Every day it turns in one direction or another, offering one harmony and the other. Being a prophet of economic catastrophe in the world’s leading power has become a full-time job to the extent that, once the post-covid rebound has calmed and the avalanche of interest rate hikes has been unleashed, many analysts have not stopped to predict a fall that doesn’t happen and it’s been two years. Each new macroeconomic data is likely to anticipate a desperate collapse or to confirm that the “plane” of the American economy is not going to land “softly”, but that it wants to continue flying. When this last thesis regained weight in recent days, a graph appeared which gives a lot of oxygen to the “pessimists” and which concerns company profits.
THE great sign from heaven that every month the story changes, it is official employment report. If at the beginning of August the weak figures for July established the fear of a bloody recession, the brilliant figures for September once again established the reading of an economy which is not giving in and which will allow the Federal Reserve to lower interest rates. interest without having to gallop after having raised them in record time from 0% to more than 5%. The truth is that the closely observed labor market offers a gray scale that gives wings to all theories. It is true that there is a general cooling of the data, but talking about normalization after the pandemic is not the same as talking about a return to old bad memories.
Bernd Weidensteiner and Christoph Balz, economists at Commerzbank, explain it this way in their latest report: “Over the summer, fears that the US economy was heading towards a recession resurfaced in the financial markets, triggered by weak data on the labor market. The significant drop in the savings rate raised the question of the sustainability of the strong growth in private consumption, which until then was one of the pillars of the economy. The extent of the concerns can be seen in the fact that the Reserve. The Federal Reserve lowered its benchmark interest rate by 50 basis points at its September meeting. She apparently worried that she had waited too long to cut interest rates.
Today, continue the two analysts, these fears have been considerably allayed: “The change in attitude is due to the September employment report, published a week ago. During this month, non-farm payrolls increased by 254,000, which exceeded all forecasts. the data for the previous two months were revised significantly upwards. Since mid-2024, the pace of job creation has accelerated. At the same time, the unemployment rate fell slightly again.
For these same economists, the scenario borders on the idyllic. Its main point of support is that the fort increase in private consumption expenditure recently recorded seems to be more durable than expected. According to the latest figures, the household savings rate has not declined sharply over the past year and a half, as previously reported, but has remained largely stable at the 2023 level.
“Households therefore did not live beyond their means, which would have run the risk of significantly lower consumption over time. On the contrary, consumer spending increased in line with income, which which would mean that a correction is not likely as long as the labor market remains stable,” conclude Weidensteiner and Balz.
What the consumer pillar resists – around 70% of the GDP of the American colossus – is precisely based on a labor market that these economists consider to be largely stable, since the business profits have increased significantly in recent times and, after all, have been 11% more than a year agothey emphasize. “As this is the main driver of business investment in machinery, buildings and intellectual property, as softwarethis suggests that investment and, therefore, employment will continue to grow in the coming quarters,” they predict.
But that’s when the crack emerges, highlighted by Société Générale strategists in a recent report for clients. “While most economists focus on continued consumer resistance as the reason for GDP upside surprises, others, such as myself and our own US economist Stephen Gallagher, believe that Surprisingly strong US profits, a key part of the economic cycle“, presents Albert Edwards, a seasoned real estate strategist who came to work for the Bank of England.
The strength of profits across the U.S. economy – with margins reaching record levels in the wake of the pandemic – is likely a key reason the U.S. recession has not come at the right time, Edwards admits. It can be said that the profits of the entire economy tend to drive the business cycle. But this also brings us to the other side of the coin: Profit declines usually occur before a recessionbecause they force companies to reduce their investments (including their inventories) and their hiring. A drop in profits usually precedes an economic recession.
What is the problem behind the good results of all American companies? As his colleague Andrew Lapthorne’s chart included in the report reflects, aggregate income data (including economy-wide income) is being changed. inflated by a small number of large-cap stocks.
Looking at the components of the very broad S&P 1500 stock index, if you exclude the top 10% of companies, profits are barely increasing. If the richest 50% are excluded, profits fall. This dynamic is confirmed by the Russell 200 small caps and small unlisted companies listed by the NFIB (National Federation of Independent Business).
“Inflationary greed (also known as price gouging) is undoubtedly one of the main reasons why Profit margins increased after the pandemicalthough unit costs have also skyrocketed. This was unprecedented, as rising unit costs had always led to falling margins. Call it what you want, it’s one of the main reasons the United States avoided recession. But the chart shows that it may just be a few large, very large-cap companies that are causing this rosy picture of overall earnings,” Edwards says. And given that It’s small businesses that drive job growthand not large, ultra-large-cap companies, “the U.S. economy could remain vulnerable to recession as long and variable monetary delays affect the system,” he concludes.
Furthermore, Edwards develops the problem: any drop in profits (especially in large companies) is not immediately visible on the stock market, because, he explains, “financial managers have sufficient (legal) means to achieve pro forma profits“My former colleague, James Montier, developed the ‘C score’ in June 2008 to identify companies which, in his words, falsify accounts, that is to say which resort to financial tricks to maintain the illusion growth and profits,” he adds. .
Speaking specifically about misleading or distorted data, Edwards comes full circle by pointing his index finger precisely at the correct September employment numbers. Citing analyst Jeffrey P. Snider, he notes what happened in January 2001when it was reported that nonfarm payrolls had increased by 268,000 jobs, a significant figure then as now.
“The stock market rejoiced, because the Federal Reserve had also just cut rates for the first time that month. But just two months later, a recession began and the sharp rise of January 2001 followed. “Something similar happened with the sharp increase in interest rates 166,000 in the October 2007 payroll data, just two months before the recession began,” Edwards recalls. “The data on wages are late, unreliable and will be reviewed,” he laments, extending his complaint to the revision made a few days ago by the Bureau of Economic Analysis (BEA) of the US Department of Commerce on the American savings rate.
After reporting that the savings rate had fallen worryingly below 3%, the agency looked at the data and real household income, instead of 1%, apparently increased by 3%, with the savings rate actually being 5%. “This is a HUGE assessment,” Edwards complains in all caps. “I’m almost sorry that the Federal Reserve is trying to make policy when the economic data is clearly bullshit,” he says flatly. Is the recession monster under the bed and are the data drowning out its cries? It’s time to keep waiting.
