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The consumer has been the healthiest part of the economy, but the corporate sector will determine if that trend continues.

 

As mentioned in prior posts, the consumer segments of the economy have been generally performing better than the corporate segments.  This pattern will likely persist if corporations continue to generate the profits required to support their current payrolls.  S&P 500 earnings per share growth was negative on a year-over-year basis in Q1 and Q2 of this year, and is on pace to be negative in Q3, according to Factset estimates.  Profit margins are also expected to decline for the third consecutive quarter.  If this trend continues, there is a risk that corporations will have to start letting go of employees.  In turn, this will possibly start to negatively impact consumption growth and will put the current economic expansion at risk.  As Ned Davis Research notes in the chart below, historically profit margins tend to peak seven months prior to the unemployment rate bottoming, which occurs ten months prior to the start of recessions. 

Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html . For data vendor disclaimers refer to www.ndr.com/vendorinfo/ .

Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

Corporate profits in Q3 and guidance for future quarters will be key data points in determining the trajectory of the consumer as well as the overall economy. 

 

Rank Dawson, CFA
Vice President, Investment Strategy

Boyd Watterson Asset Management, LLC

 

The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance.  The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.