Data revisions are not everyone's cup of tea and some may question their relevance given our forward-looking nature. So, why bother?
In some cases it is worth the effort of looking into the details. That is clearly the case for the recent revisions of US GDP data for the 2014-2018 period. The interesting information is not on the front page, but in the national income revision and the details provided on page 47 of the BEA report (thanks Will Denyer from Gavekal for pointing that out). The BEA revised its calculation of corporate profits downwards for the three years 2016 to 2018, by 1.2%, 4.4% and 8.4% respectively. That amounts to a hefty USD 188bn for 2018.
Where did the money go? The adjustment is allocated to net interest expenses and labor compensation. The latter is particularly interesting.
Economists have spent countless hours in recent years debating why the share of US labor income has not risen in this current expansion. To be fair, the income share is still low and the downtrend remains intact, but after the revision, the cyclical dynamic of the data suddenly looks a lot more normal.
Instead of having remained stuck for the past few years, compensation now shows a decent move upwards (See Figure 1). The cyclical upswing from the low in 2015 is now 3.5 percentage points, which is in line with the rises experienced in 2006-2008 and 1996-2000.
It may well be that the Phillips curve (linking inflation to unemployment) has been declared dead, but it seems that some of the cyclical mechanics of sharing the income pie are still intact.
What is the upshot, then? The implications certainly are not as dramatic as an upward revision in the inflation numbers, but this new data does suggest that the risks of an unexpected rise in inflation have increased, and that corporate earnings are not immune to cyclical trends.
We can also look at the profit-to-GDP levels after the revision, as indicated in the charts below. The below chart shows the data that was available at the time of our June Quarterly Outlook, and the following chart reflects the updated data.
Notice the difference: instead of a flat line at around 11% of GDP since 2015, profits are now gradually declining as a proportion of GDP.
What a difference a little data revision can make…
We have long positions in shorter-maturity linkers, on the view that the risk of stable to higher core inflation is not properly reflected in market prices. Within the asset class we have a preference for European linkers as their valuation has reached attractive levels.