Back in 2007, a simple device allowed me to pin-point the start of the current recession on the fourth quarter of 2007. Instead of relying on massaged data, I simply looked at what was the real situation of American corporations. For doing so, with the Bureau of Economic Analysis data on GDP using the Table 1.10. Gross Domestic Income by Type of Income, I calculated and plotted the Undistributed Corporate Profits (corporate profits that are neither paid as corporate profits taxes nor paid to shareholders as dividends) as percentage of GDP. That proved to be a very interesting chart, and produced interesting and timely information.
Based on my own ideas of the current economic situation, and the general climate of despair and fear about the future, I decide to re-run the chart with updated information. We have only data up to the 3rd quarter of 2008, so the situation may be much worse than during the 4rd quarter (anecdotal evidence seems to point to a deterioration of the economy during the fourth quarter). In any account, lets play the complete chart to give some perspective on the current situation up to the 3rd quarter of 2008.
The chart shows a few interesting things:
1. We are not in a depression yet. Undistributed corporate profits from 1931 to 1933 were negative, something that has not happened again since. At the onset of the depression, from 1929 to 1930 Undistributed corporate profits fell 70%.
2. Up to the 3rd quarter of 2008, the economic recession was shallower than the 2001 recession (let’s wait for the four quarter data to see where we are now). When I say shallower, I mean it is only “academically shallower” (0.003056935 in 2001, against 0.003545593 in the 3rd quarter of 2008).
3. More interesting, for me, is the decline of American enterprise ability to retain profits as percentage of the GDP. American enterprises peaked in 1965 and have been declining since, with each new profit squeeze being deeper than the previous one. We need to see if the Q4 data validates this trend. My guess is it is going to show a deeper lower point as this seems to be the historical trend.
4. The above trend, if it does not break with the next 2 quarters of data (that’s it, shows a higher bottom than the previous recession), seems to suggest that if it not during this economic contraction (all things being equal), the next economic contraction will be a full blown depression with negative corporate profits. We are perilously close to the 0 line here.
However, this chart does not show the whole story with American corporate profits. To understand why this decline is so painful and looks so scary, we need to chart the rate of decline (or its speed). In other words, instead of focusing on how low we are, lets see how fast we got so low.
The above chart shows the percentage change from the previous year.
As you see, now the picture shows that we had not seen declines of this magnitude or speed since the great depression. The rate of decline seems to be stable now and my contrarian self thinks that the risk of a new depression has been averted so far. With less than one month to see the economic announcements of the new administration, it may be safe to start relaxing (with a vigilant eye).
This article is part of the series "Documenting The Hyperinflationary Genesis"
- Bernanke’s creative solution: Let’s do it again
- At a financial crossroads
- How to survive hyperinflation
- Let the party begin. We will be dead tomorrow
- I have $ 100,000,000,000 and yet I can’t retire
- Is the Dow Jones at a new high?
- Stagflation: This Time It Is Different
- The Myth Of Gold as Inflation Hedge
- Is Gold a Hedge Against Excess Liquidity?
- Disposable Personal Income Shows Disturbing Historical Trend
- Things That Go Bump in the Night
- Greenspan: Give Homeowners Financial Aid: Financial News – Yahoo! Finance
- Black Swans, Bell Curves and Stagflation
- The Gold Scam
- And Now They Tell US
- Some Historical Perspective on the Current Recession
- Gold Correction Seems Over
- Gold Chatter
Franklin @ January 2, 2009