The GDP numbers for the US came out again and they were weaker than anticipated, coming in at 2.2% for real GDP growth instead of the 2.5% expected. With the GDP deflator also being low at 1.5%, nominal GDP growth was only 3.7%. I should point out that there is a good historical relationship between nominal GDP growth and corporate profit growth. This should make sense in that deviations can only represent aggregate margin growth or compression. Since we know that margins are cyclically high, it stands to reason that the lower nominal GDP path must eventually be mirrored by lower profit growth. At this point in the business cycle, almost all of the productivity gains from cutting have been realised. Therefore, I expect the lower nominal GDP path to be reflected in lower earnings growth.
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Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.