Profit margins in the US are contracting, with the second quarter showing a 6.0% decine in profit per unit of real gross value added (Nonfinancial). Contraction of greater than 10% would be cause for concern, but we need to dig a little deeper.
Earnings per share for the S&P 500 Index declined for the last two quarters and is projected to decline for the next two quarters as well (Q2 which is 98.6% complete and Q3 2015).
The sharp fall in index earnings is primarily caused by losses in the Energy sector. Other sectors are reasonably healthy.
Another cause for concern is bellwether transport stock Fedex. Commencement of a primary down-trend normally warns that economic activity is contracting. Freight revenue for the fiscal fourth quarter increased by only 1%, while ground revenue increased by 19%. Slower earnings growth due to a lag in fuel surcharges and integration challenges with the acquisition of TNT may both be weighing on the stock.
The Freight Transportation Services Index, however, has turned upwards.
And the LoDI Index continues to climb.
The LoDI Index uses linear regression analysis to combine cargo volume data from rail, barge, air, and truck transit, along with various economic factors. The resulting indicator is designed to predict upcoming changes in the level of logistics and distribution activity in the US and is represented by a value between 1 and 100. An index at or above 50 represents a healthy level of activity in the industry.
Spending on durables remains promising, with light motor vehicle sales rising.
And construction spending (adjusted for core CPI) climbing steeply.
The ISM Manufacturing PMI Composite Index remains above 50, indicating expansion, but is softer than it has been for a while.
The Leading Index from the Philadelphia Fed, however, at a healthy 1.57%, continues to project a healthy economic outlook.
Despite the falling Fedex stock price and softer PMI, there does not appear to be much wrong with the US economy. The positives outweigh the negatives. Analysts’ optimism about an fourth quarter upturn may be a little premature, but does not appear far off-track.