May 26, 2022

Today's Economy: Corporate Profits Crater.

There has been a major "data dump', as Wall Street likes to call it. A release of several economic reports by the various government agencies and independent bureaus that each day report on how our economy is performing.

And today's particular data release gives us a perfect bird's eye view of the overall economy.

The first conclusion: the macroeconomy is at least as bad as we previously thought. Today was the second revision of the GDP. Next month will be the third and final revision.

Today it was reported that GDP actually dropped another 1/10%, to a minus 1 1/2% for that critical second quarter of the year.

Now I know that a lot of people on the street were hoping that the first report was an outlier, and this number would improve today. Not so. The overall economy is at least as weak as first reported, and probably weaker.

Essentially this is saying that the economy in the second quarter was at a recession level. Not yet called a recession officially. That would take another quarter like this one. But economic activity was consistent with a recession.

And what's the more remarkable, this is following one of the strongest economic quarters in recent memory. First-quarter GDP rose by nearly 7%. So from one of the best quarters in years to one of the worst. Indicating just how weak this second quarter really was.

A dire warning going forward.

The other major trend reported was that inflation continues to roar ahead. There were three measures of inflation, and all were higher. Basis inflation, as measured by the GDP was up one full percentage point during the quarter. A huge jump.

But if you dig a little further, you find that inflation was concentrated in food and energy, those I!! O!!! gasoline prices.

Take away food and energy, and inflation doesn't appear to be much of an issue. The core inflation rate only rose 1/10%, for the second quarter. Not bad considering all else.

So we have clear evidence of the primary drivers of inflation: food and energy.

Following the inflation numbers came consumer spending. Normally we would assume that any increase in consumer spending is a positive. And we did see that increase in the second quarter. However, as we just saw, the consumer is having to pay up for gas and food.

Finally, the report will hit Wall Street right between the eyes. Corporate profits. For investors, corporate profits are those earnings that we base our stock prices on.

Today came the first look at Q1's corporate profits. And to say this is a shock is a real understatement. Wall Street was looking for so-so profits. Rising about a half percent. Slightly above the previous reading.

Instead came the real shock of the morning. Corporate profits went negative in a big way. Falling by more than 4 1/4%.

Rework those spreadsheets, boys, and girls. This is big time.

Think the stock market is overvalued? That's not half of it. It is really, really overvalued if this number is correct. Price-Earnings ratios just went through the roof. As for the Earnings part, the denominator, just cratered.

Perhaps there are some fundamental reasons for this stock market decline after all!

So, overall the reports presented this morning, show an economy at least as weak as we thought. The real surprise of the morning was that precipitous drop in corporate earnings.