Tuesday, February 7, 2012

Earnings as leading indicator

U.S. equity earnings appear to have declined, if ever so slightly, in 2011:Q4 from 2011:Q3. (Click on "Index earnings" to see the data, in xls format.)


I was curious to see whether stock earnings are leading, lagging, or coincident with the business cycle, so I put together some data. Below are the dates for the cyclical peaks of the economy, as determined by the NBER, the peak of the inflation-adjusted Shiller earnings, and the lead or lag between earnings and the economy:


Economy peak Real earnings peak Lead (+) / Lag (-), in months
Oct. 1873 Nov. 1873 -1
Mar. 1882 Jan. 1881 14
Mar. 1887 Dec. 1886 3
Jul. 1890 Jan. 1890 6
Jan. 1893 Jun. 1892 7
Dec. 1895 Jan. 1896 -1
Jun. 1899 Dec. 1899 -6
Sep. 1902 Dec. 1902 -3
May. 1907 Jul. 1906 10
Jan. 1910 Jan. 1910 0
Jan. 1913 Dec. 1912 1
Aug. 1918 Dec. 1916 20
Jan. 1920 Dec. 1916
May. 1923 Dec. 1923 -7
Oct. 1926 Aug. 1926 2
Aug. 1929 Dec. 1929 -4
May. 1937 Sep. 1937 -5
Feb. 1945 Jun. 1945 -4
Nov. 1948 Jul. 1949 -8
Jul. 1953 Sep. 1953 -2
Aug. 1957 Mar. 1956 17
Apr. 1960 Aug. 1959 8
Dec. 1969 Jan. 1969 11
Nov. 1973 Dec. 1973 -1
Jan. 1980 Sep. 1979 4
Jul. 1981 Sep. 1979
Jul. 1990 Mar. 1989 16
Mar. 2001 Sep. 2000 6
Dec. 2007 Jun. 2007 6
Avg. 3.3
Median 2.0


The average lead time is 3.3 months, and the median lead is 2 months. There is substantial dispersion, though: from a maximum of 20 months, to a minimum of -6 (i.e. the earnings peak occurred six months after the economy peaked). For the last three recessions, earnings crested before the economy did.

That is not to say, of course, that every earnings peak is a foreboding of recession. In part the trick lies in defining a "peak" for earnings. There have been multiple local maximums over the decades, with no ensuing recession. Still, a possible peak in earnings adds to the body of evidence that suggests that the odds of a recession in the near term are high.


1 comments :

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