So, naturally, analysts and casual observers are worried that these might be the first warning signs of something scarier, like a recession in the US economy.
In light of that, it’s important to point out that the US stock market is not the US economy. And therefore, things that hit the stock market will not necessarily affect the US economy as a whole the same way.
In a recent email to clients, Deutsche Bank’s Torsten Slok shared two pie charts capturing this. One chart showed the share of the US employment in service industries versus manufacturing industries, and the second showed the share of earnings in S&P 500 coming from service industries versus manufacturing.
“A key difference between the S&P500 and GDP is that most of the earnings in the S&P500 come from the manufacturing/energy/goods producing sectors but those sectors make up only 14% of total employment in the US economy,” he writes.
It’s the manufacturing/goods producing industries that have been slowing substantially. And it’s responsible for just a sliver of the employed workforce while representing the bulk of the S&P 500.
“The higher dollar and lower oil prices have a much bigger negative impact on S&P500 companies than on GDP,” Slok continued. “As a result, we are having a profit recession without an economic recession.”
Additionally, although Slok does not touch on this, it’s notable that many of the companies that make up the S&P 500 have a lot of their operations abroad, especially in Europe and China. Analysts have previously attributed their poorer Q3 earnings to that fact, as opposed to to something stateside.
Still, the “big question” here is whether the slowdown in the manufacturing and energy sectors could spill into the service sector.
“So far, there are not many signs of that happening. … The service sector is doing just fine,” Slok writes.
“Combined with the fact that lower oil prices will continue to support consumer confidence and consumer spending I continue to believe that we will have a profit recession without an economic recession,” he concludes.
Only time will tell.
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