US: The Markets vs. the Economy – Goldman Sachs

By FXStreet Jan Hatzius, Research Analyst at Goldman Sachs, suggests that the US labor market recovery continues to make good progress.

Key Quotes

“How can we square this upbeat picture with the continued struggles in the equity and credit markets? One popular explanation is that the financial markets look forward while employment and wages lag. This view implies that a sharp economic slowdown may lie ahead, and maybe even a recession.

The risk of a US recession, while higher than a year ago, is still below the historical average. This is largely because there are few signs of either economic overheating or excess leverage, the two most reliable economic harbingers of recession historically.

An alternative explanation is that the equity and credit markets discount the nominal dollar earnings and cash flow of companies large enough to issue stocks and bonds, not future real GDP and employment, and that this distinction now matters. First, a tighter labor market has started to put upward pressure on labor’s share of GDP and corresponding downward pressure on profit margins, so profits are underperforming revenue and output. Second, commodities and China—the two biggest global economic worries—have a much bigger weight in the revenues of large publicly traded firms than …read more

Source:: FX Street