Feb 25, 2019

Goldman: Earnings recession doesn't equal economic recession

With Wall Street analysts anticipating a possible earnings recession in 2019, Goldman Sachs' economic research team estimates that this could, but is unlikely to, lead to an actual recession.

Why it matters: The forecast 10% decline in profits lowers GDP growth by 0.6 percentage points, Goldman's analysts note, and if earnings growth were to slow to 15 percentage points it could knock a full 1% off of first quarter GDP, now projected to slow from 2018's pace.

But, but, but: Analysts listed 4 key reasons not to expect a recession this year:

  1. Historical correlation between earnings and economic recessions is not very tight — 13 of the 22 S&P 500 earnings recessions were not followed by a recession within 2 years.
  2. Lower corporate tax rates contributed nearly half of the roughly 20% growth in S&P 500 earnings in 2018. Much of the profit slowdown reflects the well-anticipated fading of this one-off factor, with minimal growth effects.
  3. The Fed's U-turn on raising rates has unwound much of the financial conditions tightening seen in the fourth quarter.
  4. The impact of higher labor costs will be offset in part by cheaper oil. Faster wage growth statistically raises capex growth as firms substitute capital for labor. Cheaper oil and higher wages should also support consumption.

"Weaker profit growth is likely to weigh somewhat further on economic activity but does not indicate an impending economic recession," Jan Hatzius, and Goldman's research team said in a note to clients.

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