US Corporate Earnings

My Dearest Moo Moo Cow,

The Dow had another wonderful run again finishing at the all time high. ( click here for CNN Market Wrap. )

I thought it would be nice to read what the market commentators at FSO would say. Today's market wrap is made by Chris Puplava. Who's Carrying the Economic Baton? Part I -- The Corporate Sector?

I would like to highlight the point he made about US Corporate profits, as I believe a more balanced view is always needed.

• The Corporate Sector

  Analysts are right to point out the health in the corporate sector as quarterly profits have consistently come in with double-digit gains on a year-over-year (YOY) basis for years now.

  
  

  Figure 1

  
  

  
  Source: Moody’s Economy.com

  
  

  However, what is also clear is that the trend in corporate profits is slowing, with Q4 2006 profits down 0.3% from Q3 2006, though the YOY rate came in at a very respectable 18.3%, though down from the 30.56% rate seen in Q3 2006. The argument many financial and economic pundits are making is that with pristine balance sheets, corporations will pick up the slack in the economy from a weakening consumer. In essence, corporations will continue to spend and take on more leverage by expanding their businesses. Is this happening? Yes and no.

  Corporations are taking advantage of their pristine balance sheets and the low interest rate environment by taking on more debt as corporate debt growth reaccelerated after what appeared to be a peak earlier last year. Corporate debt growth came in at 6.5% Q3 after peaking at 9.6% in Q1 2006, but reaccelerated to 10.9% in Q4 2006. Can corporate debt growth compensate for decelerating household growth to support the economy?

  Generally both the corporate sector and household sector debt growth trends move in unison, with household debt growth leading the corporate sector. There has only been one period in the last 50 years where corporations continued their debt growth while the consumer segment contracted.

  The period occurred in the middle 1960s as consumer’s retrenched while the corporate sector also retrenched briefly before reaccelerating its debt growth, and presents a possible scenario to the current picture. In Q2 1966, corporate debt growth peaked at 12.4% and then fell to 9.1% in Q4 1966. It then reaccelerated to 13.6% in Q4 1967 to help offset the decrease in consumer debt growth which peaked at 11.1% in Q1 1965 and bottomed at 2.8% in Q4 1966.