June 9, 2023

Hi, I’m Brian Beaulieu, CEO/Chief Economist of ITR Economics, and thank you for joining us for this edition of TrendsTalk. Three things I want to cover today. We’re not going to get bogged down in a whole bunch of numbers. It’s really more of an overview. And the first is the mixed signals that are out there in the economy right now, in fact, I wrote about this in this month’s trends report, the executive summary, and you can read all the details and dive into it there. But what’s new is that some indicators are actually turning up. And on the face of it, they have statistical validity, that the probability of rise is in some cases like two-thirds, so six or 7% probability of additional rise.

And it’s understandable then why somebody like Goldman Sachs came out and said that they are decreasing their chance of the US sliding into a recession. And I certainly get that. I mean, we dove into these numbers and tore them apart and our fundamental concerns about the economy haven’t changed. When we look at the leading indicators, we want to know why they’re doing what they’re doing. And the hard data ones are still very worrisome. Sort of the upside is being driven by more transient things that can dissipate pretty quickly under these circumstances. High interest rates, unemployment claims seemingly beginning to rise here in June. So we’re looking at all this. We know you are also. I just want you to know we’re on top of it and it is not any reason for us to change our forecast at this time, although we are asking ourselves that question all the time. But the concerns are outweighing the green shoots that we are seeing right now.

So that’s point number one. Point number two, and it ties in with number one is corporate profitability is declining, domestic corporate profitability. And obviously in the financial sector, it is worse there. Those profits are down 20, almost 26%, year over year, and they’ve been declining in a three month moving average basis since December of 2021. But now we’re seeing non-financial corporate profitability beginning to go down also. And when you combine those two together, the whole picture turns negative, running below year ago levels, and for all domestic corporations, the trend is almost steeper than normal and likely to continue through the second quarter. We’re only in June, so we don’t have second quarter data yet, but it sure looks to us like Q2 is going to come in yet again below the prior quarter. And that’ll give us three consecutive months of decline.

Which leads me to my third point. The stock market is defying gravity at the moment while corporate profitability is going down. How long do you think that’s going to last? And when it gives up the air supplying all the stock activity? The widening delta between share prices and profits means that the next leg down in the stock market is going to likely be relatively painful and relatively abrupt. You know we don’t time the market. It’s just sort of a heads up. We’re moving in the direction where we’re going to see the rise that has occurred so far in 2023 give way to decline, probably by the end of this year, and the decline could be steeper than or at least equal to the magnitude of the rise that we’ve seen so far. I expect it’s going to get us below where the starting point was for the current rally.

So that’s the update on what the indicators are telling us. The overview is that seems like there’s some good news, but it’s not as good as it seems, at least not from our perspective. Corporate profits are very much a concern and what that means for the stock market is obviously a concern as well. I understand why some people are wondering, “What does this all mean?” We’re asking ourselves that same question and we come up with you can’t escape these higher interest rates, you can’t escape that retail sales have really slogged down to minimal growth in nominal dollar terms and real dollar terms. Good news is that incomes are still rising. That’s the best we get. Thanks for joining us for this TrendsTalk. See you next time.