United States: Latest signals inconsistent with an imminent recession

Chart of the week

The second estimate of US first-quarter GDP(1) is based on economic data that include corporate profits and income and that provide a fuller picture of macroeconomic conditions. They are less reliant on accounting practices and enable meaningful comparisons over time.

The data provide insight into the financial health of US businesses along with some interesting cyclical indicators. For instance, while real pre-tax profits typically decline about eighteen months before the onset of recession, recent numbers have only been falling back for six months.

We also track the ratio of net interest expense to gross operating surplus, which tends to rise steeply ahead of a recession. So far, the ratio remains at a reasonable level.

OUR ANALYSIS

Higher US corporate borrowing levels are often seen as a risk for companies, but the low interest-rate environment means that debt levels are not generally putting undue pressure on corporates. Some sectors are more stretched than others, but even including high-yield borrowers, coverage ratios (interest expense/EBITDA(2)) are at their highest since 2007.

Although trade war uncertainty is capable of dampening corporate investment expenditure, the type of steep fall-off that would enable companies to clean up their balance sheets seems unlikely.

 

(1) GDP: main economic indicator for measuring economic production within a given country.

Consult the list of tasks to be accomplished on the discussion page.

(2) EBITDA: Earnings before interest, taxes, depreciation, amortization and amortization refers to a company’s earnings before interest, taxes, depreciation, amortization and provisions on fixed assets are deducted.

The opinion expressed above is dated June 7th, 2019, and liable to change.

 

This document is not pre-contractual or contractual in nature. It is provided for information purposes. The analyses and descriptions contained in this document shall not be interpreted as being advice or recommendations on the part of Lazard Frères Gestion SAS. This document does not constitute an offer or invitation to purchase or sell, nor an encouragement to invest. This document is the intellectual property of Lazard Frères Gestion SAS.

 

 


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Julien-Pierre Nouen

Directeur des études économiques et de la gestion diversifiée