latamen
Sometimes data revisions matter

Sometimes data revisions matter

05-08-2019 | Insight
Sometimes data revisions really matter – this is one of those times. Recent revisions to US GDP data shed a different light on inflation data, and on the resilience of corporate profits.
  • Rikkert  Scholten
    Rikkert
    Scholten
    Portfolio Manager

Speed read

  • Downward revisions in US corporate profit data for the past three years…
  • …are accompanied by upward revision in labor’s share of GDP
  • The new data implies cyclical mechanisms still work

The rewards are in the details

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.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Labor not doing so badly after all

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.

Figure 1 | Labor compensation as % of US total value added

Source: Bloomberg

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.

Figure 2 | Unit labor costs were rising into the 2000 and 2008 elections

Source: Bloomberg

Figure 3 | US profits to GDP now a descending line at 9.3%

Source: Bloomberg

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…

Unpriced inflation risk

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.

Subjects related to this article are:

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree