There’s a ‘storm brewing’ in the US economy

Wednesday, June 15, 2016
By Paul Martin

Bob Bryan
June 15, 2016

It could get ugly in the US economy before long.

While everyone has been distracted by the strong labor market and the decent consumption, the real breakdown in the US economy has been coming from the corporate sector, which is what Paul Mortimer-Lee of BNP Paribas argues in a note titled “US Growth: Storm Brewing?”

“Why have so many, including the Fed, not seen the risks that now appear all too concrete?” asked Mortimer-Lee, chief US economist at BNP.

“The answer is that they have been looking in the wrong direction, lulled into a sense of complacency by strong jobs growth and solid consumption. What this view has overlooked is that the threat of recession comes from the corporate sector.”

According to Mortimer-Lee, the drop in profits in the corporate sector typically presages a recession. In this case, the stagnant inflation has reflected an inability of US companies to increase prices to the level necessary to maintain profits while labor costs have been rising.

Said another way, companies are paying employees more, and they can’t hike prices to keep up with the rising cost. Thus, profits fall. This increase, according to Mortimer-Lee, is strikingly like the lead-in to the 2001 recession, which was preceded by a drop in corporate profits.

“We believe that in an economy with a significant profit-oriented private sector, the rate of profit and its dynamic is a key determinant of the business cycle,” Mortimer-Lee wrote.

“While some have argued that cycles don’t die of old age, declining rates of profitability are often a sign that the economy is very sick, no matter what the age of the recovery.”

The Rest…HERE

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