Three months ago, we presented an analysis which showed something disturbing: according to Deutsche, the “current business cycle is already the fourth longest in the post- WWII period, and the corporate debt-to-GDP ratio suggests that imbalances are building”, and that worse, as a result of soaring corporate debt and rolling-over profit margins, “a recession could hit as soon as the second half.”
Overnight, and three months since its last such analysis, Deutsche Bank has published an update. It shows that, as illustrated in the chart below, profits per worker have generally trended higher over time. This is a function of productivity gains and inflation. However, this has changed in recent years. “In the current business cycle, margins peaked at $18,752 per worker in Q4 2014. This compares to a ratio of $16,487 per worker as of Q2 2016. Margins have fallen because corporate profits have declined -6.3% annualized over the past six quarters, while private sector job growth over this period has been very steady at around 2.1%.”
And before we get the usual “but… but… you must exclude energy” complaints (we wonder why: it is becoming increasingly obvious that oil is not going back to $100 so the new normoil may well be crude at $50 or lower, which means including all energy-related data), here it the punchline: it’s excluded.
In light of collapsing productivity, declining domestic demand, and sliding growth of real final sales, how has the US corporate sector avoided a full-blown recession so far? Simple: it has been loading up on debt to mask the income statement effects of declining demand. As DB calculates, the corporate sector has taken on a substantial amount of debt in the current business cycle. Nonfinancial corporate debt has increased by $4.5 trillion from its trough in Q4 2009 (the latest corporate debt data correspond to Q1 2016). As illustrated in the chart below, the ratio of nonfinancial corporate debt to nominal GDP is at its highest level since Q1 2009, when the economy was still in recession and nominal output was substantially depressed. Alongside tepid demand, the weakness in corporate balance sheets means that the Fed needs to be alert to any possible tightening in financial conditions, for one reason: based on nominal corporate balance sheets, the US is already effectively in a recession – the only thing preventing the hammer from falling are record low interest rates, keeping interest coverage ratios at all time lows.
So if the corporate balance sheet screams recession, what does the corporate income statement say?
Summarizing all of the above: based on corporate balance sheets and income statements, the US economy may be in a recession as of this moment… and if it isn’t, even just one rate hike by the Fed, either in the September 21 meeting or in December, will assure that the backbone of corporate America, already straining under record debt and tumbling profits, will finally snap.
Full article: Deutsche Bank: The US May Now Be In A Recession (Zero Hedge)