Profits Matter

Over the next few weeks, the economy will be at the forefront of the news.  The Federal Reserve meets this week.  Jobs data comes out Friday.  Expect a lot of noise about the US and the world economy. 

As I’ve written, I think the US has already entered a slowdown, certainly on the industrial side.  A slowdown does not mean a recession (classically defined as two consecutive quarters of negative GDP growth) but it could be a precursor to a recession.  If we have a recession, I expect it to be relatively mild, especially compared to 2008 -2009. 

I came across a great chart that is pictured below.  It came from the Daily Shot from the Wall Street Journal.  It is a great resource on all things finance and the economy. 

Corporate profits are falling.  That’s never a good sign.  Despite what some presidential candidates keep saying, profits are a good thing.  Without profits, there is no investment.  That means no new equipment, no raises, no hiring.  Profit is not a dirty word! 

As my statistics professors repeated over and over, “Correlation does not mean causality.”  The decline in profits might not be the cause of a recession but the correlation over time certainly makes me think this is a metric worth paying attention to.

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