Profit Decline Waves U.S. Economy Caution Flag: Chart of the Day

Close
Open

Falling corporate earnings pose a risk for the current U.S. economic expansion that deserves more attention from investors, according to Albert Edwards, a global strategist at Societe Generale SA.

The CHART OF THE DAY shows how Edwards drew his conclusion in a report yesterday. He tracked profit after adjustment for changes in inventory values and depreciation, an accounting charge that reduces the value of assets. The figures are compiled quarterly by the Commerce Department.

Adjusted pretax earnings fell 9.8 percent in the first quarter, according to data released last week. The drop was the steepest since the fourth quarter of 2008, when profit tumbled 26 percent in the midst of a recession and financial crisis.

The decline reflected the expiration of tax provisions allowing companies to take bigger depreciation charges, Edwards wrote. Even so, this barometer “can give a good indication of economic vulnerability and predict unexpected recessions,” the London-based strategist wrote.

First-quarter earnings after taxes fell 6.8 percent from a year earlier, as Edwards highlighted in a chart. The comparable figure for profit before inventory and depreciation adjustments rose 5.3 percent.

The latter number is “misleading investors as to the underlying strength of profits,” Edwards wrote. “The bottom line is that the U.S. profits margin cycle has begun to turn down at long last.”

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net Jeremy Herron, Jeff Sutherland

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.