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By New_Deal_democrat May 29, 2015 11:17 am
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Updating the long leading indicators with Q1 corporate profits
With this morning's revised first quarter GDP, all 3 forward-looking components of that data have been released.

In the preliminary report, real private residential investment was reported to have increased to a new post-recession high.  That was confirmed this morning, and is consistent with the new highs in housing permits and starts that we saw in April, after February permits tied the previous November high.

Gross Domestic Income is the opposite side of the ledger to GDP.  Theoretically the two should match.  Over time it is generally thought that GDP converges towards GDI.  This morning we found out that GDP for the first quarter was positive, up +1.4%.

On the negative side, first quarter corporate profits went down somewhat sharply, -$125.5 Billion, or -6.2%.  This is -7.7% off their peak, although they are still up about 4% YoY.  A better measure is corporate profits after tax.  These did improve, but are still just a  hair short of their Q3 2014 high.  Prof. Geoffrey Moore deflated these by unit labor costs in his model of long leading indicators.  Since unit labor costs rose slightly in the first quarter, adjusted corporate profits were down even more.  Below I've shown corporate profits deflated by unit labor costs both before (red) and after (blue) taxes:

Summarizing our long leading indicators, only two have made unambiguous new highs this year: housing and real M2 money supply. As to corporate bonds, while BAA bond yields did make a new low in January, this was not confirmed by AAA bonds.  Corporate profits, as indicated above, are still shy of their previous post-recession peak.  Another good long leading indicator, real retail retail sales per capita, also peaked late in 2014.

I continue to be positive about the remainder of 2015, despite the poor Q1 GDP reading and the so-so start to Q2.  As to 2016, especially after the 1st quarter, the jury is very much out.

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