CHART OF THE DAY: MARGINS AND EMPLOYMENT
15 January 2010 by TPC
29 Comments
Today’s chart of the day comes to us courtesy of JP Morgan. This chart shows the very high correlation between corporate profit margins and unemployment. Connecting the dots here is fairly simple. As corporations tighten their balance sheets, reduce spending, and bolster cash they position themselves for eventual economic recoveries. As we’ve seen during this economic downturn corporations have done a remarkable job cutting costs and maximizing ROI in every facet of their businesses. Corporate profit margins are now nearing their all-time highs and job markets appear to be stabilizing. Could the improvement in profit margins also be forecasting a sharp decline in the unemployment rate?
More on this topic
(What's this?)
No Wonder Many Americans Are Pessimistic
(Financial Armageddon, 2/9/10)
Where the Jobs Are
(Financial Armageddon, 1/19/10)
Roubini: We Are in Trouble, U.S. Growth is Dismal, Unemployment to Rise
(Shocked Investor, 2/1/10)
Unemployment Report Set to Reflect the Bitter Face of a Jobless Recovery
(Money Morning, 2/4/10)
Its a chicken and egg thing. And a balance thing. Which drives which? Improved profitability allows companies to hire, but companies fire to drive improved profitability. Employees with jobs drive consumer spending increases which increases hiring, but firing to improve profitability lowers spending power.
Which comes first the chicken or the egg? Which is the more powerful force, especially in a globalized economy. Profitability can drive hiring in export related industries without any domestic demand, but the total effect of 10%+ unemployment has yet to be felt. Who says that unemployment won’t start negatively effecting sales (and profitability) again soon. IF it does, then companies can just keep cutting their way to profitability. Or can they? The whole thing is a delicate balance.
It seems to me that US large companies started using recessions as a cover to cut expensive US workforce and hire cheap workforce elsewhere. For this reason there will be no improvement in employmenet situation until small businesses , which are mostly local, start hiring. And small businesses are at least a year from that, and that is IF we don’t have a double dip.
Actually, even small businesses now outsrouce a lot of admin and IT work to India.
this is not 84′ 92′ or 03′……i could depress u with a long list of reasons………alot i have gleaned here,my first stop on the internet every day 630 AM.
we are in totally unexplored territory. in the middle run it will not be pretty.
The profit rate is not predicting the unemployment, the unemployment rate is predicting the profit rate – the former predicting the general direction of the latter. Un-invert the series and you will find that this is true.
Unemployment rises before the profit rate turns up, and falls before the profit rate turns down.
Charley Reply:
January 15th, 2010 at 9:11 AM
And, it appears to predict the direction several years in advance.
Charley Reply:
January 15th, 2010 at 9:16 AM
In fact, the current employment rate appears to be predicting much higher profits – peaking well over 20 percent – for several years going forward.
TPC Reply:
January 15th, 2010 at 9:21 AM
Not sure how you see that. Margins are clearly the leading indicator. Everyone knows employment is a lagging indicator.
Charley Reply:
January 15th, 2010 at 12:44 PM
Not according to the data displayed on the chart. If you will note: Unemployment peaks anywhere from two or three to five years before profits hit their peak. The trough in unemployment in 1998-1999 predicts a turn to higher profits rates beginning in 2000-2001.
This is what I see on the chart. What do you see in he chart. (Not what “everyone knows”, but what is actually there on the chart.)
TPC Reply:
January 15th, 2010 at 12:54 PM
Profit margins are the dark lines. They clearly bottom in advance of the inverted UE rate….
Charley Reply:
January 15th, 2010 at 2:39 PM
TPC,
Unemployment troughs before each recession – that is what your data shows. So we see a trough in 1990, in 2000, and in 2006-7. The rate of profit begins rising toward the end of the recession. So in your data the rate of profit trough occurs in 1991, 2002, and 2009 in the present recession.
I am not making this up TPC – this is what your chart shows! It follows that the unemployment peaks in 1992-3, and 2004, are leading indicators, not lagging, of a peaking of the rate of profit in 1998 and 2006-7.
I am only using your chart for this conclusion.
Charley Reply:
January 15th, 2010 at 4:49 PM
TPC,
You are right about this…I rethought it and see the logical fallacy behind my view. A firm is motivated by profit! (Don’t know what I was thinking.)
Thanks for the post.
Charley
Wrong. The economy is going back in the tank bigtime. Wear your swimsuit. You’re gonna get wet.
LQQk @ my profile, realist data sponge etc… I don’t know much, but I understand piggy banks, and pockets. I know you cannot keep taking out without puttin’ back in. Even if you print counterfeit money your drawer will soon empty out, and socialism works until the money runs out and we are OUT…
I have been selling dollars, having one in my pocket is not funny. I simply like a clinking sound of two doubloons hitting together in my hand. If I put one thousand dollars in cash money in your hand, and $1000 in gold in the other, which would you walk out of the room with, and how fast?
I rest my case.
BTW, want real bang for ur buck, buy Palladium…. wowsie, I started about a month ago, and I am up over 40% PAL and physical. Betcha can’t buy just one..
next silver eagles, now there is real money… gold you bet, pant wheeze, man how am I gonna to carry all this stuff?
I’ll figure it out.
Capt. Brian
The Lost Navigator
PS here’s how, go get some numismatics, better than diamonds, and value beyond conpare. then when the dust clears, sell them back for the new money whatever it may be.
happy grins to all
This info comes from JP Morgan – a “Bank” that just posted losses. What do they know – Government Welfare – that’s what. We the Fed give you the “Bank” money & you the “Bank” lie about the economy – understand?
“unemployment” is an inherently negative term. “improvement” in unemployment is thus ambiguous, confusing. By “improvement” do you mean bigger / growing (more unemployment) or better / desired, (less unemployment)? Clear syntax is a basic of practicality. Good wishes on liberating yourself from our dumbing down influences.
EmilyP Reply:
January 15th, 2010 at 4:41 PM
Nowhere in the definition of “improvement” are the words “bigger” or “growing”. Rather, one definition is: a bringing into a more valuable or desirable condition. Would an increase in the unemployment rate be a desirable condition? Uh, clearly not. Maybe next time you should just refernce a dictionary if these complicated words are confusing you so much and not waste our time in reading your stupid comment. God i hate assholes.
Leo Olson Reply:
January 15th, 2010 at 5:23 PM
note to EmilyP: To want clarity of understanding is to want clarity of communication, is to want ambiguity eliminated, other than in some purposes, like poetry. Words carry associations, implications, that are not always included in dictionary definitions. Hatred is inside the hater. Harms the hater, not the hated. I do not hate you. In this I wish as well for you as for myself.
TPC Reply:
January 15th, 2010 at 5:32 PM
Leo, please don’t try to make yourself sound more intelligent than others here. You made a condescending and useless comment. Anyone versed in financial terminology understands what an improvement in unemployment means. You’re talking yourself in circles.
If you have something meaningful to add then by all means be my guest, but indirectly attacking others is futile – even though you seem to think you haven’t done so.
Leo Olson Reply:
January 15th, 2010 at 9:19 PM
Hello TPC,
I’ll take it you are management speaking. Please consider that from me this is not about you, or me, or any us. I don’t feel either of us intends something personal to come of this. I see addressing pollution anywhere to be a meaningful aspect. Pollution is not only in our drinking water, genetically modified crops, chemtrials, politics, banking, etc.. It is also in language. Tyrants and tyrant wannabes foster confusion and deceit and debasement, as in mainstream media, academia, entertainment, etc. To take our minds off the important struggle, elites vs targeted people, they give us false paradigms, like left vs. right, religion vs. science, blacks vs whites, etc. Dividing to conquer is a theme of theirs. They like us misunderstanding matters. An us weakened is an us easier to rob. Not only of trillions, but of freedoms. They feed us figures of speech which accustom us to accept inaccuracies and confusions, like giving us euphemisms to better accept their harms.
My hope is that you will be a help in warding off assaults, that go even to our thinking processes. The concepts on your website still have me thinking I’m not talking down to you. Or that language use is irrelevant to topic.
Recalling your seeing me as guest, I do not intend to reply to what closing comment you might make on this.
Regards, Leo
EmilyP Reply:
January 15th, 2010 at 5:36 PM
You don’t want clarity. You just want to see how smart you can look when you use big words and make demands of others.
TPC Reply:
January 15th, 2010 at 5:06 PM
When bad things improve you get….1+1-….
La reducion del valor de los trabajos,es el resultado de todo este tira y jala,los que trabajan lo hacen por nada.y todo lo justifica el temor al de desempleo, este efecto durara mucho mas de lo imaginable ,lo utilizaran ,talvez para siempre ,hasta llegar a ser los chinitos us
TPC Reply:
January 15th, 2010 at 5:09 PM
Dios mio. Necesitas usar palabras despectivas?
Irresponsible government practices (forcing banks to lend money to buy houses to people who would have never qualified for mortgages under normal lending conditions under the pretext of fairness), greed (mortage broker/bankers qualifying anyone with a pulse for a mortgage, in order to collect mortgage origination fees), and out of control consumerism (people buying things they can’t afford, from houses to cars, and blowing up a huge credit bubble) brought us here.
Now the president is talking about leving taxes on large financial institutions that used TARP, but conveniently excludes from it Fannie Mae, Freddie Mack, AIG, GM, GMAC, et al
The mortgage/housing crisis has not hit bottom yet and a two new crisis, these created by the current economic policies, loom in the horizon:
1 – The possibility of a severe devaluation of the US dollar within the next 12-18 months as a result of the ballooning debt and the indiscriminate printing of dollars by those in charge; This may bring about some degree of hyper-inflation.
2 – Consumer/personal debt defaults, which will further weaken the purchasing power of an already decimated consumer. At the rate we’re going, it doesn’t matter how much money the banks have to lend, if nobody qualifies for loans. Unless, of course, the government forces banks to lend money to non-qualifying consumers, as it did with housing before, exacerbating the consumer debt bubble/crisis even further.
Technical indicators (charts) try to extrapolate things that happened in the past in an attempt to predict what may happen in the future, but I believe everything that happened between 1929 and 2007 can be excluded as a precedent, for this is a totally different crisis, in a totally different environment, affected by circumstances we have not seen since the 1929 – 1930s crisis.
In the current climate of extreme economic uncertainty, when nobody knows what radical anti-business, anti-capitalist measures the current administration may decide to decree overnight, most small business are hunkering down and trying to merely survive, and the last thing in a small business owner’s mind (I was one of those until recently) is to borrow money to expand, or hire more people. That is not going to change until/unless the current climate changes. The public sector can only create so many jobs (most of them fictitious, anyway) for so long. The private sector has to be the one grabbing the baton and taking us out of this disaster but, as things stand, this isn’t going to happen anytime soon so it is reasonable to expect unemployment to remain very high for quite some time to come.
I think the most important thing to do at this time is to stop tinkering with Capitalism, stop misusing TARP as a slush-fund, do not increase taxes, and fight corruption at all levels. As someone quoted on TV recently: “we have all the regulations we need, we just need capable and ethical regulators to enforce the existing regulations”.
I also thing we need to vote-out of office 100% of the Democrats, and 90% of the Republicans in both legislative bodies, and populate them with new blood, with people that have not been corrupted by Washington’s frame of mind yet and, from now on, impose limits on the number of times an elected official can be reelected. We already have term limits for the President, why not do the same with Senators and Representatives. Recent polls have shown people’s confidence in Congress to be consistently under 20%. It’s time for REAL change.
boatman Reply:
January 16th, 2010 at 8:18 AM
i feel like i wrote that myself jason.
not a word out of place son.
Some valid points here, but what’s holding back hiring is uncertainty of pending federal regulation, taxes etc. Hard to plan hiring & capex when you don’t know what it’ll cost.
You got it right, but enemployment always lag the recovery, byt how long is still a guess. During the past recession, unemployment rate lagged recovery by different time frames. But one thing I find more like is that there will be a recovery in unemployment rather than corporate income or confidence going down again
Interesting to note that the type of recession that this is not covered by the graph. No credit, no home ATM, no demand, no rehiring en masse.
The chart is mostly useless information. There are many variables that attribute to profitability and unemployment. One barely affects the other. Supply and demand is a much bigger factor, so is investment results, capital expenditures, credit-rating, taxes, C.E.O. role, Wall St., world economy, regional economy, politics, war, peace, etc.,etc. Please don’t make a mountain out of a mole hill.
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