Is it 1937 Again?

Ezra Klein asks a good question:

Where will the recovery come from? The problem is that no one has an answer. And as one hopeful hypothesis after another is dashed, the markets are beginning to panic.

It won’t come from the United States. Our recovery has slowed, and updates to the Commerce Department’s growth figures have shown that the hole we’re in is significantly deeper than we realized. Thursday’s news only underscored that conclusion, as the early signs suggest that Friday’s job numbers report will be disappointing.

It won’t come from Europe or Japan. The debt crises in Greece, Spain, Portugal and Italy have quieted any conversation about recovery and raised the question of whether the Eurozone can survive. And Japan is still trying to rebuild after the horrific earthquake and tsunami that ripped across its coastline back in March.

For some time, the hope was that recovery could come from the world’s emerging economies, driven by China. But after years in which the Asian giant managed to defy global economic trends and post one incredible growth number after the other, the Chinese government is admitting that the economy has overheated and they need to begin tapping the brakes.

One obvious answer to Klein's question: We have had a good - even dazzling! - corporate profits story in the 2nd quarter of 2011. Maybe the growth can be led by the corporate sector? Not so fast, answers a new study by Goldman Sachs, as reported in Canada's Financial Post. Based on a study of 11 past recessions, Goldman Sachs determined that:

while past GDP growth helps explain profit growth, past growth in profits doesn’t often explain GDP growth, according to the report.

Analysts’ measure of future corporate earnings growth, on the other hand, was almost always significant, and the report found them to be an efficient way to employ profits for economic analysis.

So in other words, 2nd quarter corporate profits do not tell us much about 3d or 4th quarter GDP. Corporate profits look backwards, not forwards. The signal to listen to is early information on this quarter's profits. Fingers crossed, because otherwise the world outlook looks very scary.