THE MORNING RANT: What Does It Portend when Neither the Government Nor Corporations Are Providing Reliable Economic Reporting?

I am not warning of economic doom. However, I am very concerned that with the government providing falsified economic data, and with corporations becoming aggressive about manipulating financial reporting, we no longer have an accurate picture of economic activity or business health. The fact that those publishing these financial reports feel the need to massage the data is alarming all by itself, and the enthusiasm in financial circles to embrace what are clearly dishonest reports is a form of willful blindness.

I have written repeatedly about how the government’s economic reports are fraudulent. The Bureau of Labor Statistics habitually publishes favorable numbers regarding jobs and unemployment, then quietly does negative revisions after the initial euphoric headlines. Likewise, the BLS’ official inflation figures are laughably understated.

Just this past week, the Bureau of Labor Statistics reported some great economic news, “U.S. adds a much-better-than-expected 272,000 jobs in May”. But this was despite the unemployment rate increasing to 4%. Meanwhile, the BLS also reported that the labor participation rate has decreased.

Excuse me, but my brain is struggling to reconcile an increase in the number of jobs, concurrent with a decrease in the number of Americans working, while at the same time the unemployment rate increases.

The increase came even though the labor force participation rate decreased to 62.5%, down 0.2 percentage point. The survey of households used to compute the unemployment rate showed that the level of people who reported holding jobs fell by 408,000.

Either there is some fraudulent reporting by the BLS that will be “adjusted” in the future, or jobs are being lost at a much faster rate than new jobs are being created.

Meanwhile, corporations are starting to abandon the Generally Accepted Accounting Principles (“GAAP”) which investors and lenders have always relied on for accurate presentation of companies’ financial performance. To show better-than-actual financial results, companies are aggressively using “adjusted earnings,” which add back actual expenses that were incurred, thus pumping up the results in their earnings reports. The excuse for doing this is that these are one-time, non-recurring expenses.

“S&P 500 Companies Boost Profit by Stripping More Items From Earnings” [Bloomberg – 5/22/2024]

An analysis of earnings reports was done by a data firm named Calcbench, which randomly chose 260 companies from the S&P 500. It found that these companies added back a combined $182 billion of expenses in 2023 in reporting their “adjusted earnings.” This resulted in the reported “adjusted earnings” being a whopping 29% higher than their actual GAAP net income.

US regulators in recent years have become increasingly concerned with companies’ usage of non-GAAP measures, with the Securities and Exchange Commission sending letters to various businesses asking about the rationale for stripping out certain expenses.

The rationale is that corporations sometimes incur extraordinary expenses that do not recur every year, therefore they should be added back to net income for reporting purposes, since those expenses don’t reflect normal operations. The trouble with this reasoning is that while a specific expense may be non-recurring, it can be expected that there will be numerous different non-recurring expenses that will occur regularly, all of which consume cash, and all of which will reduce the true GAAP bottom line.

Think of your own household and the various non-recurring expenses that periodically happen, even though they are not part of your regular monthly household operating budget, e.g. the new tires, the broken window, the A/C compressor, etc. None of these is likely to happen in any given year, but you are not able to “adjust” your checkbook upward when these household expenses do happen.

Among the examples identified by Calcbench were Walgreens adjusting its earnings upward by $7.5 billion for legal and regulatory expenditures, and 3M adjusting its earnings upwards by $11.6 billion for litigation expenses.

Walgreens pointed to its most recent quarterly filing, in which it stated that in 2023, the company “recorded charges related to the opioid litigation settlement frameworks and certain other legal matters.” 3M, meanwhile, said it does not consider the litigation charge to be a normal operating expense related to its ongoing operations, revenue generating activities, business strategy, industry and regulatory environment.

There are many of us for whom GAAP accounting has been the foundation for how we monitor corporate performance. This intentional distortion of corporate earnings and cash flow is making reporting that was once accepted without question into something that is unreliably opaque.

Most, or 86% of examined companies, adjusted income upwards in 2023, meaning non-GAAP income was higher than GAAP income, whereas 14% adjusted it down.

The accounting chicanery of Enron was supposed to be a cautionary tale, not a role model.

Intentionally distorted economic and financial reporting - whether it comes from government or corporations - is a red flag about our economy. It’s also an indictment of those holding positions of power and responsibility that they now see financial reporting as a way to conceal information rather than for conveying it accurately.

My latest piece at The Pipeline, ’Record’ Temperatures: a Statistical Certainty, has been published.

In it I discuss the statistical certainty of “record” high temperatures being recorded, and how, on average, each US weather station should record three record-high daily temperatures each year. I also explain how it is a statistical certainty that on average there must be hundreds of “all-time” record high temperatures recorded each year at the 38,000 US and European weather stations.

Of course, I also discuss the media’s willful role in spreading falsified temperature reports to heighten the fear of a climate apocalypse.

I’d be honored if you’d give it a read.

[buck.throckmorton at protonmail dot com]

posted by Buck Throckmorton at 11:00 AM

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