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On the Sunny Side of the Road
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Because it’s important to count your victories whenever and wherever they may occur, especially in tough economic times like these. Good news can be something to build upon and will hopefully be contagious.
The good news is that global earnings are down except for one place…right here in the US. That’s right, Bloomberg TV reports that among the major regions in the world, the only place with earning trending higher from 2011 forward is the US.
It’s not earth-shattering news, I admit, but it’s not bad either. Does it mean that the US economy is on the way back?
It might, but that’s less obvious, especially with the Fed's latest gloomy report. But hey, at least it’s something...
Bucking the global trend
Now, let’s be clear about what earnings we’re talking about. This certainly isn’t US household income; that metric has been trending downward for years since the global financial crisis and even before then…
No, the earnings Bloomberg refers to are corporate earnings, on an earnings per share (EPS) basis. You know, S&P 500 firms’ corporate earnings.
Is that a bad thing?
Not at all. It’s good news in a lousy global economy. And, there is more good news that comes with it…
Much of the sources for those earnings are US firms that get most of their business, most of their revenues, from the US. This means that relative to Europe and the Far East, as in China and Japan, US consumer demand is, apparently, less damaged or healthier, depending upon how one chooses to look at it.
Does this mean that we’re on our way to recovery? It’s the logical question, since consumer spending makes up about 70% of demand in the US economy; rising corporate earnings derived from the domestic market must be a good omen.
And it is. But I would caution that it’s not as cut and dried as it may seem.
Corporate revenues are less clear about the direction the US economy is heading. Think about it this way, earnings per share can increase due to lowering costs. A big part of cost is labor. Automation and cheaper labor abroad both contribute to lower production costs. Lower costs means higher earnings per share, all other things being equal.
Another factor to consider is how much of corporate earnings are from the financial sector?
Enough, it turns out, to make the difference in the earnings trend. Take the financial sector out of the calculation and the US corporate earnings trend is flat or even negative. In other words, they come to resemble the rest of the world.
What to make of it? I would say we should make as much of it as we can, while we may. It’s not perfect news, but it’s better than it might have been.
Small business still struggles
And this makes sense when you look at other economic data. Consider small business for example…
Small business employment is also slightly up, but the Small Business Revenue Index shows that there was an overall decline in revenues in June of about 0.5%, which includes the construction industry, which accounts for about 20% all employment in small business. So not only are small businesses still struggling, but the construction industry, which is closely tied to the housing industry, is not in recovery yet.
The housing industry, of course, is a key indicator for any real economic recovery. In fact, it is much more important—and less subject to manipulation—than corporate earnings per share. Although, the housing market is certainly not immune from abuse altogether.
Is say this because, as I mentioned a few days ago in the Home Truths about the Housing Market edition of The Gorrie Details, while Zillow.com and others announced that the housing market has finally bottomed out, new housing purchases are down by 8.4% since last year. If fewer folks are buying new houses, and that is the case, then the housing market is not yet in a positive trend, is it?
What is happening is that large funds are now buying distressed homes and renting them. That is a different housing recovery than most would expect, but at some point in the future, those houses will be sold again. In the meantime, they are being repaired, and neighborhoods restored. So that, too, is good news; just not in the way or from the source that was expected.
Better than bad news
That’s how we should view the corporate earnings report.
The take away from the corporate earnings trend is that regardless of the source, if it helps support the markets and the economy, then overall, it’s worth having. Sometimes it’s not the big stuff that makes the difference in life, but rather, the little things that have the biggest affects. If it changes consumer sentiment, for example, it could have a ripple effect on other parts of the economy. It’s the old but still relevant saying of “how you look at things matters.”
Are corporate earnings a “little thing?” Not really. But it’s not a huge factor either, when all is considered. But it is a spot of sun light on an otherwise cloudy, late afternoon in the global economy, and really, everybody else wishes that they could say the same thing about their corporate earnings. So let’s call it a good thing and have hope that it’s not the last good thing, and go from there. After all, it could be worse.
And those are…The Gorrie Details.