Next month’s CPI data is perhaps more important than the payroll report. After four soft readings, another low print for the core CPI would be very hard to ignore. The FOMC could be forced to scrap rate hikes and concentrate on reversing QE. Even that may be a risk if core inflation continues to head lower.
The FOMC will need to pay close attention to the profits data: the recent slowdown in core inflation mirrors the dip in profits. According to the Bureau of Economic Analysis, unit profit margins peaked in Q3 2014. By Q1 this year, margins had shrunk by 18.3%. The data for Q1 showed that margins are now 4.8% below the high of Q3 2006.
Profits were being squeezed long before the financial crisis erupted in 2008. This data also provided an early warning of the impending reversal in technology prices from March 2000 onwards.
The recent decline in profits appears to contradict the ‘strong’ growth in earnings reported in the S&P. The discrepancy relates to the different measure of profits released by the BEA. The headline measure of profits used by the BEA is before tax, with IVA and CCAdj, and is a better measure of underlying profitability.
Summary
- S&P earnings strong
- But BEA preferred measure of profits showing weakness
- Falling profit margins (BEA) linked to decline in corporate tax receipts
