As the current US expansion hits its 83rd month, several traditional business cycle indicators are beginning to warn that trouble may be on the horizon. During the past few months, corporate profits and nonfarm payroll growth have recorded figures that have in the past preceded an official recession.
Corporate profits before tax, which undergo a series of inventory and capital consumption adjustments by the Bureau of Economic Analysis, provide a timely, quarterly snapshot of the portion of total income from current production that comes from US corporations and can be used to measure the current financial health of US corporations.
Corporate Profits — Less than Zero
The current level of before-tax corporate profits remains near an all-time high in the US, but corporate profit momentum continues to wane. Since the 1950s, when corporate profits recorded negative year-over-year growth for three consecutive quarters, a recession usually appeared within one to two years — Q1 2016 data marked a third consecutive quarter of negative year-over-year growth. While this remains a definitive warning signal regarding the staying power of US growth, there are exceptions to the rule. During the mid-1980s it took the US nearly four years after the first appearance of three successive quarters of negative year-over-year profit change to enter an official recession.
Each cycle contains unique characteristics, and the current one is no different. Similarities between this expansion and the 1983 expansion can be linked by certain attributes. Both contained a historically strong US dollar against major trading peers, but the 1983 expansion followed on the heels of the 1980 and 1981 recessions or a double dip, which is clearly missing from the current expansion.
Expansions such as those in 1961 and 1983, which followed expansions of very short duration (under 25 months), tended to last longer than others once corporate profits began recording three straight quarters of year-over-year declines. These conditions are not currently present (the 2009 expansion was preceded by the 2002 expansion that lasted 72 months).
Nonfarm Employment Losing Momentum?
In addition to corporate profits, the US nonfarm payroll number, which many consider the eminent indication of economic health, has also flashed warning signs recently. Once again, Dun & Bradstreet has observed patterns between monthly net nonfarm payroll numbers in relation to the economic cycle. Generally, the labor market cycle is fairly consistent between economic cycles.
Since the 1950s, monthly net nonfarm gains traditionally remain weak, from anywhere between six to 12 months after a cycle trough or during the beginning of an expansion, then grow at a strong pace for an extended period of time before once again returning to a weaker pace as the expansion reaches its mature phase. This is the fourth-longest expansion cycle since the 1950s.
By observing the average month-to-month change in payrolls during an expansion, we can get an idea of when the labor market cycle reaches its final stage. After last month’s disappointing nonfarm payroll number, employment gains have recorded two successive months of below-trend-cycle growth, including during four of the last five months. While it may be too early to call a peak in the labor cycle, it is worth noting that if historical patterns are consistent we may be closely approaching the peak.
Regardless of which camp you are in — imminent recession or expansion forever — the data are currently raising red flags about the staying power of this cycle. There is no need to panic just yet. But if you’re keeping score at home, make sure you mark down these developments as they are beginning to flash cautionary signs.
Adam Morehouse is a Macro Analytic Consultant on D&B’s Global Data, Insight & Analytics team. He covers parts of the Asia Pacific region as a contributor to D&B Macro Market/Country Insight Products. He also contributes to D&B’s monthly economic tracker, adding both commentary and analysis. Adam holds a BBA in finance from James Madison University in Harrisonburg, Virginia, and an MBA in financial management from Pace University in New York City.