US Corporate Profits
A couple of weeks ago, I posted something on LinkedIn, as I had seen a rather worrying chart of US corporate profits..............Just saw a chart of US corporate profits with the inventory valuation adjustment - it shows a massive drop in Q1. The chart without the inventory adjustment shows a continuing upward trend. It's clear that the level of corporate profits to GDP is worryingly high, the question is has it rolled over? From the looks of the chart, the correction is rather severe and there appears to be an anomaly - perhaps the impact of one quarter of inventory unwind is much more significant coming after 4 quarters of inventory build?
I asked for people's input and eventually I read something which Albert Edwards had written on the subject. Now I am a great fan of Albert Edwards; apart from being very entertaining and laughing when he is wrong, he produces some very insightful analysis. It turns out that there is an adjustment which looks plain wrong; it's not the inventory adjustment (which was my assumption because of the move from inventory build to inventory drawdown in Q1). In fact it relates to the capital adjustment - no point in getting technical here, but there is a cessation of a US tax allowance and the reversal of this while "correct" in accounting terms gives the wrong economic picture.
I produced the chart above from the St Louis FED data and it looks like the UNadjusted line is giving the more meaningful indication of corporate profits. I am not sure that this is a bullish outcome, given that the bears can perhaps justifiably argue that corporate profits to GDP is extremely high and possibly unsustainably so, but I am relieved that it's all explicable. Thanks Albert.