Corporate Profit Expectations Drive Payroll Growth
SUMMARY:
For Q1 NFP, falling future corporate profit growth dictates
- <100K per month IF S&P 500 EPS projections are met
- <50K if they miss
US corporate managers are a simple group: nearly two-thirds of compensation comes in the form of equity (stock or options). And stock prices move with profits.
Profit growth above all else. A drop in profit growth is a call to action. Entering Q4 2010, CEOs expected a 2011 to hit 20% growth. Instead, profits stumbled hard: tumbling to 4% in Q4 2010 and again in Q1 2011. Management quickly focused on resource management (people and inventory). Hiring slowed and profit growth promptly rebounded sharply: 10% in Q2 and 12% in Q3.
As the chart illustrates, profit growth was directly threatened by rising resource costs. When growth fell to 4%, the Executive dashboard dial spun firmly into the yellow zone. Hiring and inventory growth reined in fast. Anything more just overcomplicates the story.
Coming up: Slow Down at the Not-So-Ok Corral
S&P 500 projections call for a smooth slowdown in EPS growth; a dip to 10% from 15% in 2011. Let's accept that for the moment. What happens to NFP?
Note: Extreme swings during the Great Recession make the comparison hard to read. The chart removes those 4 extreme dates.
NFP Growth Drops when EPS growth falls <15%, After a 2 Quarter Lag
In 2003 and again in 2006, when EPS growth falls below 15%, NFP growth drops fast within 2 quarters. Given that Q2 2011 started the current EPS drop to <15%, that means Q1 2012 NFP growth will drop significantly.
Quantifying The 2012 NFP drop
When EPS growth begins to deteriorate, NFP growth falls fast.
Extrapolating to 2012 using 2006 as an example (similar EPS slowdown scenario):
That's assuming the same rates apply, and they probably don't. They are lower today.
And it's also assuming that EPS targets are hit. At the moment, things seem more bearish. Earnings surprises are taking a negative turn:
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Companies beating expectations (Q2 vs. Q3): 69% vs. 66%
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Companies missing expectations (Q2 vs. Q3): 20% vs. 24%
Where will NFP Drop?
Based on EPS misses, 5 sectors are stumbling or about to stumble.
